AA plc (lon:aa)
The AA – As Expected On A Steady Road To A Few Pence?

AA plc Financials

ItemCurrent PeriodPrevious Period
Year20202019
Period12 Months12 Months
Revenue£995m£979m
Earnings
Adjusted Earnings
EBITDA
Adjusted EBITDA£350m£341m
Statutory Profit£87m£42m
Adjusted Profit
Total Debt
Net Debt£2600m£2700m

Commentary History
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AA plc Share Price
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Title: The AA – As Expected On A Steady Road To A Few Pence?
Company: AA - AA plc
Share Price Then: 19p
Author: Ian Smith
Date: Mon 18 May 2020
Comments: When I last looked at the AA in Feb 2018, I was pretty downbeat at 88p because of the debt of around £2.7 billion.

One thing that I hadn’t realised at the time was that Woodford was quite heavily into the company, I would have been more optimistic and wrong had I known.

I am looking at it again as at 19p it popped up as a big loser and worth reconsidering, so it is now a buy?

The latest Annual Report is just out, 18 May, and it shows a good trading performance and the shares are ones that I would like to own except that net debt is £2.6 billion, down from £2.7 billion.

Roadside revenue is unchanged but business customers dropped to 9 million from 9.8 million and driving instructors went down to 2,235 from 2412, not ideal but not enough to get too worried over.

The insurance division saw a small increase to 1.7 million policies from 1.6 million revenue up from £138m to £154m.

Some insurance companies have been returning premiums to customers because the vehicles were not being used due to COVID-19 it seems that the AA will not be following suit.

It still seems to me that there is no real plan for repaying the debt at any reasonable rate, just a hope that maybe it can be reapid over the next 25-30 years and that it can be refinanced when due.

Principal Interest   Effective
(£m) Rate (%)Maturity
200 4.25% 31/07/2020
372 2.88% 31/01/2022
570 5.50% 31/07/2022
250 2.75% 31/07/2023
550 4.88% 31/07/2024
500 6.27% 31/07/2025
325 5.50% 31/07/2027

You can almost draw a straight line from the 400p share price at float in 2015 to today’s 18p, so the question is where if anywhere will it stop?

With a market cap of around £120m a share issue that meaningfully addresses this debt would simply wipe out any existing share holders and I suspect that this is the main cause of the lack of interest.

But and this is a big but, the current management may be happy to ignore the debt as the company is trading well and this could result in some sort of share price recovery lead by speculators planning for a short term hold.

Or the share price could simply keep on dropping to a few pence, at which point the company would be almost free. So if you have a spare couple of billion, you could reduce debt to something manageable and have a business returning 10% on that capital.

To me that could make the AA a Berkshire Hathaway buy.
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