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AA remains saddled with debt

While the roadside recovery and insurance group predicts resilience in the face of Covid-19, its leverage is alarmingly high
May 7, 2020

Following a detailed trading update in March, there were no real surprises in AA’s (AA.) numbers for the year ending 31 January. As guided, trading cash profits nudged up 3 per cent to £350m, partly thanks to a £3m boost from new accounting standards, but also from improvement in the roadside business, which accounts for more than 80 per cent of the total.

IC TIP: Sell at 30p

Paid personal memberships returned to growth in the second half, aided by additional marketing and cross-selling from the insurance division. It’s best not to get too excited seeing as the increase was a mere 0.2 per cent year-on-year uptick to 3.22m. With customer retention steady at 80 per cent, average income per member rose 2 per cent to £165 on the back of more monthly subscriptions which carry a higher premium.

Over in insurance, the number of motor and home policies grew 10 per cent to 1.7m. Investment in ‘insurer hosted pricing’ enabled the group to secure more customers from price comparison websites. But spending to attract new business weighed on the trading cash profit margin which fell 3 percentage points to 39 per cent.

Despite the Covid-19 pandemic, AA believes trading this year will be “only slightly below” last year. While performance in February and March was in line with its expectations, there was a material drop-off in total breakdowns in April as lockdown measures saw fewer cars on the road. New membership sales and retention rates have also softened. This has been partially offset by lower third-party garaging costs – AA typically uses external services during periods of high demand and this has previously weighed on margins.

House broker Peel Hunt has revised its forecasts down by over a third, now expecting adjusted pre-tax profit of £74m and EPS of 9.3p for the year to 31 January 2021. This is versus £107m and 14.1p in 2020.

AA (AA.)    
ORD PRICE:30pMARKET VALUE:£ 186m
TOUCH:29.9-30.1p12-MONTH HIGH:74pLOW: 13p
DIVIDEND YIELD:2.0%PE RATIO:2
NET ASSET VALUE:*NET DEBT:£2.6bn
Year to 31 JanTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20169359-0.29.0
201793310012.29.3
201896014118.25.0
2019979536.92.0
202099510714.10.6**
% change+2+102+104-7
Ex-div:na   
Payment:na   
*Negative shareholders' funds **No final dividend for 2020