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AA may yet receive offer despite deteriorating prospects

The roadside assistance group has produced a decent showing at the half-year mark, though it appears private equity interest may be waning - at least, for the time being
AA may yet receive offer despite deteriorating prospects

It must be emotionally draining for shareholders in AA (AA.). The roadside assistance group saw its market value pull back sharply ahead of publication of its interim figures, when it was announced that California-based Platinum Equity had terminated offer discussions ahead of the previously-set deadline of 29 September for offers for the group.

IC TIP: Sell at 30.1p

Two months earlier, AA said that it had been approached by several potential suitors regarding an offer and a much-needed refinancing deal. Platinum Equity has reserved the right to participate in any offer for the group within the next six months, which may also conceivably entail a combined bid with other private equity partners.

The remaining potential bidders, Warburg Pincus and TowerBrook acting as a consortium, were granted an extension to 27 October to make a formal offer. Yet given continued uncertainties over what kind of economy we will be left with after Covid-19 subsides, it is understandable why prospective offerees may want to keep their powder dry for the moment. Distressed assets are all well and good, assuming that the business they are involved in is not in structural decline. That consideration is certainly warranted where AA is concerned.

The central question is whether the lockdown and the consequent shift to remote working poses a long-term threat to the number of car journeys undertaken by motorists. If so, you would imagine that demand for breakdown services will fall accordingly.

Potential offerees may also be circumspect due to the likelihood of large-scale job losses once the government pulls its furlough scheme at the end of October. This will have an indirect impact on new business acquisition and renewal rates.

For the period under review, a slight decline in revenue (commendable under the circumstances) was set against an improved gross margin, leaving operating profits broadly in line with the 2019 half-year at £121m, though net earnings suffered due to increased financing costs.

The paid membership base contracted, albeit slightly, through the period, while the average income per paid member was broadly flat on the 2019 comparator, and the customer retention rate was also steady at 80 per cent – again, a decent showing under the circumstances. Other positives include continued improvement in cross-selling, notably in the insurance arm, and AA also successfully retained or extended all of its key contracts due for renewal in the B2B space.

Consensus gives EPS of 13.09p for January 2021, and 12.77p in FY2022.

AA (AA.)    
ORD PRICE:30.1pMARKET VALUE:£ 187m
TOUCH:29.2-30.1p12-MONTH HIGH:63pLOW: 13p
DIVIDEND YIELD:NILPE RATIO:3
NET ASSET VALUE:*NET DEBT:168%
Half-year to 31 JulyTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201949142.05.500.6
202047826.03.40nil
% change-3-38-38-
Ex-div:-   
Payment:-   
*Negative shareholder equity, including intangible assets of £1.35bn, or 218p a share.