Roadside assistance market leader AA (AA.) is down 10.1% to 150.7p as first half results add to doubts over the growth trajectory of the company.
The company’s share price is the lowest it has been since returning to the market through a 2014 IPO.
AA must have been hoping for some reprieve following the Bob Mackenzie debacle this summer, when the former executive chairman was summarily dismissed in unusual circumstances.
Investors should be buoyed by the appointment of Simon Breakwell as CEO following the upheaval and the dismissal could potentially save the company some money. McKenzie has around 33m unvested performance related shares which will probably be forfeited due to the nature of his dismissal.
However, new car sales are down and management has indicated that earnings before interest tax depreciation and amortisation would be impacted by higher investment costs. These reflect plans to improve the IT systems had been delayed.
AA also has a large amount of net debt, although it has reduced it slightly from £2.8bn to £2.7bn on a year-on-year basis. House broker Liberum admits that this ‘level of indebtedness is not to everyone’s taste’.
The company is taking steps to restructure the debt which may boost underlying earnings, although this is not expected until 2019.
Joe Brent, analyst at Liberum, retains his 'buy' rating for AA, although has moved the target price from 300p to 250p. This ambitious target still implies 66.7% potential upside.
Using Brent’s revised forecasts, AA is trading on 7.3 times 2018’s 20.7p earnings per share and paying a 6.2% dividend yield.
