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AA's rising costs dent profits

The roadside services specialist expects to return to cash profit growth this year
April 3, 2019

AA (AA.) is throwing cash at its problems. Investment in improving IT, rolling out digital products and front-line breakdown services resulted in a 13 per cent reduction in trading cash profits last year, which were admittedly in line with guidance at £341m. That decline – coupled with an increase in working capital – led to a rise in the free cash outflow of £22m, while net debt rose to a hefty eight times trading cash profits. Chief financial officer Martin Clarke said getting cash profits “back above £400m” should precipitate a reduction in that leverage ratio to between 3 and 4 over the longer term.

IC TIP: Sell at 93.4p

Paid personal membership of the core roadside assistance business continued to decline, down 2 per cent to 3.21m, while the retention rate also dipped to 80.3 per cent from 81.6 per cent. The roadside services specialist has been investing in its app to sell a broader range of products, while the ‘Stay AA’ retention programme held 72 per cent of customers that called to cancel compared with 57 per cent upon its 2014 launch. Extreme weather conditions and insufficient investment in frontline roadside assistance services contributed to an increase in the use of costlier third-party garaging services, said chief executive Simon Breakwell. “We were definitely guilty of the latter”, he said. The division’s trading cash profits fell by 12 per cent to £283m.

Likewise, the insurance business reported an 18 per cent reduction in that metric, as marketing spending by the broker and lower margin underwriting revenue rose. While motor and home policies grew, average income per policy fell from £74 to £69 due to investment in new business growth, which carries lower commissions than the rest of the book. That meant insurance services revenue was down 11 per cent to £119m.

Analysts at house broker Peel Hunt expect adjusted pre-tax profits of £115m and EPS of 14.9p for the year to January 2020, in line with the prior year.

AA (AA.)    
ORD PRICE:93.4pMARKET VALUE:£573m
TOUCH:93.4-93.7p12-MONTH HIGH:149pLOW: 66p
DIVIDEND YIELD:2.1%PE RATIO:14
NET ASSET VALUE:*NET DEBT:£2.7bn
Year to 31 JanTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20159846113.3nil
20169359-0.29.0
201793310012.29.3
201896014118.25
2019979536.92
% change+2-62-62-60
Ex-div:tba   
Payment:tba   
*Negative shareholders' equity, includes intangible assets of £1.3bn, or 217p a share