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AA's debt still sky high

The roadside assistance and insurance provider has made little progress on addressing its mountainous debt pile
September 24, 2019

Generating £44m of free cash flow in the first half of the year, AA (AA.) is guiding that it remains on track to reach £80m by the year end, one of the key strategic objectives of its turnaround plan. But while the group may point to “building operational momentum”, investors remain unconvinced with short positions running at over 9 per cent.

IC TIP: Sell at 68.6p

The core roadside assistance division has seen further erosion of the paid personal membership base. However, the rate of decline since the year end has slowed to 0.6 per cent versus 1.2 per cent this time last year. Considering this to be “stabilised”, the group expects broadly flat membership for the full year with a return to growth in FY2021.

The use of costly third-party garages to supplement its own patrol network at times of high demand has previously eaten into the roadside margin. But these costs were lower during the period due to a 14 per cent reduction in total breakdowns. Together with average income per paid personal member increasing from £159 to £165, this boosted trading cash profit by 4 per cent to £137m on the back of a 0.7 percentage point margin expansion.  

More than half of all personal breakdowns are handled via digital channels, with over 1.4m members registered on the AA app. Used in around 30 per cent of personal breakdowns, the app is seen as a way of reaching both existing and new customers, increasing cross-selling and retention. A July advertising campaign saw average monthly registration on the app increase by 5 per cent.

There is a similar technology focus in the insurance business with investment in ‘insurer hosted pricing’ (IHP) software, allowing brokers to access policy prices in real time. Over 80 per cent of new motor business volumes are being written on IHP and total motor policies have increased by more than a fifth. However, the average income per motor and home policy has fallen by 8 per cent to £67 due to investment in new business volumes, which carry lower commissions than the rest of the book.

Broker Peel Hunt anticipates adjusted pre-tax profit of £114.9m and EPS of 14.9p for the full year, rising to £123.8m and 16p in 2021.

AA (AA.)    
ORD PRICE:68.6pMARKET VALUE:£422m
TOUCH:68-68.7p12-MONTH HIGH:127pLOW: 45p
DIVIDEND YIELD:2.9%PE RATIO:8
NET ASSET VALUE:*NET DEBT:£2.7bn**
Half-year to 31 JulTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
68.6480283.80.6
2019491425.50.6
% change+2+50+45-
Ex-div:3 Oct   
Payment:8 Nov   
*Negative shareholders' equity, includes intangible assets of £1.3bn, or 219p a share. **Excludes IFRS 16 lease liabilities of £26m