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It is looking for a fresh start after disappointing investors since floating in 2014
Thursday 01 Mar 2018 Author: David Stevenson

Roadside assistance specialist AA (AA.) has decided to enter into a brave new world, led by an energetic new CEO Simon Breakwell.

Rather than just providing roadside recovery once a car’s broken down, the AA wants to develop systems that can spot when an engine is heading into trouble. The company also wants to invest heavily into its insurance businesses.

While this is very interesting, the investment case continues to be depressed by AA’s £2.7bn net debt position.

Shareholders may be wary of a company that has seen its share price plummet from over 400p in 2015 to 87p today.

The decision to launch a strategy that would mean less profit for three years and a sharp reduction in its dividend from 9p to 2p is     certainly brave.

However, major shareholders have given Breakwell their blessing. Its largest investor Neil Woodford has increased his stake in the business to 15.03% following the company’s strategy update on 21 February which also contained a profit warning.

The AA wants to target younger customers to its roadside membership scheme through new products and services. Joe Brent, an analyst at broker Liberum, warns ‘breakdowns are double edged – they cost money but they validate the model, increase future retention (if handled well) and increase pay-on-use revenue’.

Breakwell wants to create 65 new roadside patrols and 200 new call centre agents. Cutting the dividend will help free up cash that can be diverted to fund investments.

For Calum Battersby, an analyst at investment bank Berenberg, the previous plan of the AA to sort out its debt problems has failed.

Other parts of the post-IPO plan such as increasing membership have gone sideways. Since the company floated in June 2014, paid personal members have fallen by 8%.

Earnings estimates going beyond 2018 have been revised downwards by Liberum. For 2019, EBITDA and earnings per share forecasts have been dialled down by 16% and 38% respectively.

Liberum’s Brent is slightly more upbeat on the AA’s debt than Berenberg’s Battersby.

While Brent says ‘there is no silver bullet for the debt’ he adds that with better earnings momentum and growth the market might ‘become a little more forgiving on the debt’.

Battersby is unflinching, saying: ‘There is no quick fix for the AA’s substantial leverage, which we expect to remain a concern for several more years.’ (DS)

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