AA plc (lon:aa)
Such A Great Looking Price But I Can't See A Future

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AA plc Share Price
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Title: Such A Great Looking Price But I Can't See A Future
Company: AA - AA plc
Share Price Then: 88p
Author: Ian Smith
Date: Sun 25 Feb 2018
Comments: The recent drop in the AA share price caught my attention for a short period of time, its debt problem is well known at £2.7billion.

With fairly stable EBITDA of around £350 million and all loans due for repayment by 2025 there is clearly an issue, especially as the loans have an average interest rate of around 4.5%.

However if some form of long term loan were achieved over say 25 years then you could see financial stability for the company, well you could at first glance.

The private car market in the future say 15 years from now seems very hard to predict and I have real concerns on the number of vehicles in private hands.

At first glance it seems silly to say that less people will own cars in the future, it is so obviously wrong and certainly the whole repmobile market will be untouched as sales and support staff will still need to travel. These vehicles will likely remain available from private usage but insurance and recovery will continue to be decided by the company or lessor.

For owner drivers it seems likely that there will be an expansion in the number of congestion charging zones, add this to the cost of insurance and Road Fund Licence for older more polluting cars and it is very easy to see how family A will get rid of their 15 year old banger. Especially if this is a second car or a car that does very low mileage.

What will this be replaced by, an Electric Car, unlikely as even Tesla who don’t seem to be operating at a profit are having difficulty with battery cost and is the market ready for a £20k Ford Fiesta.

A new petrol or hybrid car, possibly, but once the decision is made to sell the car the idea of cycling, going by train or walking raises its head. So a new purchase may be delayed and after a few months the cost of owning a car suddenly looks a lot less attractive.

Those with a new car will likely find it stuffed with more and more autonomous systems and probable with petrol/electric hybrid power. Given the current trend of people buying cars they can’t really afford it is easy to see a move to lease only options, where Insurance and recovery is included in the price.

The AA insurance arm would probably become obsolete under these circumstances, however the recovery arm would likely either get or not get a mega recovery contract, gaining or losing a large number of members.

So in the short term another big price drop seems inevitable when a new debt management approach is found and in the longer term the market seems so unpredictable that even without debt the future for the main business model is questionable.
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