Out of favour AA (AA.) seemed to reassure investors with a pre-close trading update early on Thursday. Growth in new membership for its roadside assistance services and higher car insurance sales, added to reassurance over full year earnings, initially saw the share price jump more than 8%, yet early hubris has proved short-lived.
By mid-morning the shares had shrunk back to 134.05p, implying barely any gain at all on yesterday's 134.75p close.
The company may be a widely recognised brand yet that has done little for its stock market performance since its summer 2014 IPO.
Management upheaval last year and consistent concerns about growth have weighed heavily on the stock, and investor sentiment.
FUEL FOR THE SHARE PRICE
Today’s update provides some encouragement for the future. New chief executive Simon Breakwell says the company remains on track to match the £390m-to-£395m guidance for trading EBITDA (earnings before interest, tax, depreciation and amortisation) given at September’s half year results.
Breakwell flags progress in the core Roadside Assistance as well as the Insurance Services and Underwriting divisions.
Within Roadside Assistance, new members grew 7% year-on-year, while customer retention was ‘broadly flat at 82%’, despite the AA having to pass through Insurance Premium Tax increases and the costs arising from regulatory changes.
Interestingly, the AA saw a surge in breakdowns in the second half of 2017. Although the business incurs costs to help its customers on the road, breakdowns remind customers of the AA’s importance and should therefore increase future retention.
Investors are also cheering positive progress in the Insurance Services and Underwriting businesses. AA highlights 6% growth in motor policies to 629,000, offsetting a 5% decline in home policies to 818,000, while its in-house underwriter ‘continues to grow rapidly and now has 407,000 policies in force, just over half of which are motor policies.’
The Hampshire-headquartered concern insists it continues to churn out healthy levels of cash and ‘as a result of the refinancing in July 2017, we further reduced the cost of borrowings and extended the average maturity of our debt. We have no near-term refinancing requirements.’
Liberum Capital continues to expect full year net debt of £2,636m, down from £2,688m at the interim, which it argues should mean no dilutive rights issue will be required short term to pay down debt.
There’s also good news in that AA’s strategy review has also been brought forward from April’s full year results to 21 February and ‘should add flesh to the bones’ of Breakwell’s plans for the business.
‘We currently make no change to our full year 2018 underlying trading EBITDA of £392m, within the £390-£395m previously guided range, representing a 3% decline year-on-year, and 3% sequential growth,’ says Liberum, a buyer with a 250p price target, though the broker is also forecasting the dividend will be cut from 9.3p last year to 4.7p.
