A big fall in first half profit puts the brakes on a tentative recovery in the share price of roadside assistance provider AA (AA.).
The shares are down 8% to 110p, paring earlier heavier losses, as pre-tax profit fell 64% year-on-year to £28m. The Beast from the East led to a 15-year high for call outs and this meant AA incurred extra costs paying for third party garage space to accommodate the surge in demand.
Roadside business retention is down 1% and membership is down 2%. The insurance arm did rather better with motor policies growing 7% to 659,000.
Cash conversion was also strong and the company took £154m out of its pension deficit, improving its balance sheet position.
Liberum analyst Joe Brent has reduced his 2020 financial year earnings per share forecast by 17% to 15.5p, saying he is cautious for several reasons.
‘In 2019, we have increased the decline of paid members from 1% to 2%. Pricing in the insurance market has softened and may either result in lower average revenue per user growth or reduced retention,’ he comments.
SHAREHOLDER PATIENCE EXHAUSTED
AJ Bell investment director Russ Mould feels the negative reaction to the results reflects the exhausted patience of shareholders.
He says: ‘Though profit fell sharply in the first half results, the extremely negative share price reaction facing roadside assistance provider AA likely reflects a build-up of shareholder frustration with the group’s patchy track record since its 2014 IPO.
‘The company essentially blamed too much demand for a fall in first half earnings. A “pothole epidemic” caused by the extremely cold weather in the UK in early 2018 meant call-outs were at a 15-year high and AA had to pay third party garages to accommodate the extra broken-down vehicles.
‘Otherwise there were some more encouraging features to these results, with strong cash conversion and revenue heading in the right direction, but the company's debt levels, which remain elevated despite July's refinancing, probably makes investors less willing to give it the benefit of the doubt.
FUTURE TAKEOVER CANDIDATE?
Mould believes further weakness in the share price remains would make the company vulnerable to a bid from private equity, which might be more comfortable with the level of indebtedness.
Brent at Liberum notes that the company previously discussed at its full year results that it had taken part in ‘routine conversations’ with private equity firms but not substantive approach had been made. However, media reports suggest Hellman & Friedman made an approach last year.
‘We believe that private equity would be more comfortable with The AA’s leverage, although rising debt yields may make the equities less attractive,’ says Brent.
‘Any bid would clearly have to be at a significant premium to the equity. A private equity bid for the RAC could also provide an interesting reference point for the AA’s valuation, as it has done in the past.’
