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


ItemCurrent PeriodPrevious Period
Period12 Months12 Months
Adjusted Earnings
Adjusted EBITDA£350m£341m
Statutory Profit£87m£42m
Adjusted Profit
Total Debt
Net Debt£2600m£2700m
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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Previous Commentaries On AA plc
Date Share Price Author Commentary
Sun 25 Feb 201888pIan Smith

Such A Great Looking Price But I Can't See A Future

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.
Tue 22 Aug 2017184.5pIan Smith

AA - Something From The Past?

Is the AA a business whose time has passed?

As a members association it all made sense, but now as a plc it is sitting on debt of £2.7bn on a turnover of £960m, so you have to ask has private equity sucked all the value out of the business?

As a business they along with Green Flag and the RAC are probably quite safe as the major players, but they are dependent upon a critical mass of customers to cover the cost of their patrols.

I can't really see how they can gain significant market share in the breakdown business as there really isn't anything new to usefully offer.

With many families feeling the pinch will we start to see people taking a chance on not breaking down where they must have immediate assistance?

The have been brave in the insurance sector by taking on their own underwriter and by using the extra information they have about a member may genuinely have a competitive advantage. Equally getting this wrong would be very easy.

Car Genie initially looked exciting, but the reality seems to be less so, and the advertising phrase "It automatically lets us know about certain types of crashes, so we can be on hand to help" is worrying.

As AA cover doesn't include crash recovery you are paying the AA a fee so that in the event of an accident the AA can come and charge you for recovery!

Then we have mending boilers, how does that fit?

So there is a real danger of the AA being seen an exploitative brand rather than a trusted one.