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AA Discussion on Interactive Investor

Re: A.ctually A.ce or a D.oD.o? Follow-u... by Intellectual Amateur

  Mon, 28 Aug 2017 08:24:00 GMT
Bill & LKH: I completely understand your comments on my "I don't sell at a loss" stance; "mis-guided" is a fair description that I accept & I wouldn't encourage anyone else to adopt this peculiar rule. It is a symptom of my overall attitude to trading / the market, I guess: I am prepared to go down with the ship, at one with my stupidity, enveloped in the arms of my lover, Fate (Ha).
I bought the damn thing, so if it tanks then who's responsible? Me! I would be pretty disgusted with myself if it ever happened but I live by the sword, die by the sword.
It's one of the things I like about the market: the brutal, no hiding place aspect of it. I like the thrill of being accountable (it beats parachuting in my book!). I hate funds, trackers, bonds - I like singular stock picking - I love the clock ticking down the seconds as you decide whether this is "the price" at which you're prepared to buy or sell at. I am probably crazy.

Bill - I am very heartened by these points you make:
1) no good reason for the 20p fall - sentiment, confidence, leading to net sellers
2a) why have the AA been able to "get away with it" / raise plenty of new debt
2b) what would the AA fetch on the open market: £5-6 bill

I am concerned about non-AA related issues (short-term & long) that will likely pull general sentiment down further (much further!) but the stuff within the AA's power gives me hope, ie half year results in line, settled board, hopefully strong indications that the debt will not increase - that sort of stuff, broker up-grades would be very cool also.
Optimistic: year end SP: 187p
Pessimistic: if it falls through 150p, then it's panic in the streets, well, in my street. Ha! Ciao.
By Intellectual Amateur

Re: Is the AA now the DD? by Bill1703

  Sun, 27 Aug 2017 10:17:00 GMT
"... all I have to do now is hang in there for seven years..."

Yes, good point LKH... best you steer clear (geddit?) of the AA. It is unlikely to be a sedate ride... however rewarding it may prove eventually.
By Bill1703

Re: A.ctually A.ce or a D.oD.o? Follow-u... by Bill1703

  Sun, 27 Aug 2017 10:12:00 GMT
IA - I don't think you will find any good fundamental reason for the 20p fall in recent days... all down to confidence and sentiment, which has been undermined, and you now have net sellers, people running fearful to the exit. But you know what Uncle Warren says about the fearful and the greedy...

These are wise words from LKH, about refusing to sell at a loss... a perfectly reasonable mindset, I know it myself, but you have be disciplined about it. Particularly with this one... could easily come a time where you have to sell to avoid a more complete meltdown. BUT... I do not currently envisage the conditions which would cause this, for the foreseeable.

LKH is also right, we all like a strong balance sheet, all else equal... I think you have to view this as a "special situation", and decide whether your glass is half empty, or half full? Yes, the debt - and leverage - is huge... but why have they been able to get away with it? Very few entities could raise any finance, debt or equity, with such a structure... yet the AA has been able to raise plenty of new debt in recent times, at increasingly lower rates. And the equity was reasonably buoyant and far from distressed... until just lately?

One other way to look at it... what would AA fetch on the open market, free of all debt? A business generating some £300m of free cash flow, after 'normalised capex', and possibly a tad more going forward? With a strong, long-established brand and market position, well-invested, and with very stable, quasi-utility up-front core cash flows?

Possibly £6bn? A FCF yield of 5% (merely the market average).... certainly, £5bn I would say. But possibly even more... I know of various entities who would pay top dollar for such an asset. Which puts into perspective the current £2.7bn of debt... and also lends weight to the argument that the equity could easily be worth a multiple of the current market valuation.

Of course, not so easy to separate the equity and the debt in practice... at least in the near term. But perhaps it does make your glass look that bit more like half full....?

By Bill1703

Re: Is the AA now the DD? by LK Hyman

  Sun, 27 Aug 2017 09:54:00 GMT

"you went into a relatively weak balance sheet situation with the sausage boys."

Do as I say, not as I do, m8! Anyhoo, I went into Devro near the end of an intensive capex programme to build new snorker skin plants in China and the USA. Sure, that meant that the balance sheet was a bit stretched but I could see the prospects for a veritable tsunami of cash subsequently, as the Chinees and Amurkans (including Latinos) started playing hide the sausage big time.

Anyhoo, as you imply, it's all academic now as I've sold my Devro and handed the cash over to the next generation .... In your face, Spreadsheet Phil!

LKH on the flybridge all I have to do now is hang in there for seven years
By LK Hyman

Re: Is the AA now the DD? by gamesinvestor

  Sun, 27 Aug 2017 08:22:00 GMT
"give me a strong balance sheet every time"

LK -- You may have sold Devro, but as a holder or ex -- you went into a relatively weak balance sheet situation with the sausage boys.

The borrowings were over £160m last year and with pre-tax at £15M it's pretty weak.
AA is poor admitted, but there are a couple of important differences

AA's operating margins are 30% compared to Devro's 6+% (net +ve assets but questionable)
AA's free cash flow is 12+% and Devro's is negative. (net negative assets)

mmmmm -- makes you ponder doesn't it.

Now Devro maybe about to reverse that - let's hope so and it'll be interesting to see what happens to the two sets of share prices in 12 months, with :-
Devro at 234 and AA at 167.

Games -- Not a fan of weak balance sheets either but maybe never say never as they often utter !!
By gamesinvestor

Re: A.ctually A.ce or a D.oD.o? Follow-u... by LK Hyman

  Sun, 27 Aug 2017 07:40:00 GMT

"what you paid for the share at some stage in the future."

the past, not the future!

LKH etc
By LK Hyman

Re: A.ctually A.ce or a D.oD.o? Follow-up. by LK Hyman

  Sun, 27 Aug 2017 07:34:00 GMT

"I don't sell at a loss (pig-headed, stubborn, mis-guided?!)"

A lot of people have this attitude which is understandable psychologically but certainly misguided.

The only thing that matters is where you believe, as a result of your research, that the share price is going in the future over whatever time period you choose. It doesn't matter what you paid for the share at some stage in the future.

Personally I always reset the"cost" of my shares at the end of December every year. That enables me to see clearly, on an intra-year running basis, how my shares are doing relative to my benchmark, which is usually the FTSE100. I guess that, if I regularly underperformed year after year, I would recognise that my stockpicking skills weren't worth a cup of warm spit and would (sadly) stick whatever pitifully small heap of ackers was left into a tracker or an active fund with a long history of outperformance.

LKH on the flybridge still picking for the nonce
By LK Hyman

A.ctually A.ce or a D.oD.o? Follow-up. by Intellectual Amateur

  Sat, 26 Aug 2017 19:32:00 GMT
Thank you Games, Bill & LKH - your thoughtful & detailed responses are much appreciated here at the IA Villas; I like your positives & negatives presentation Games - very binary / ying & yang / day & night etc. My brain works like that I think, so it really helps my thinking.
I'm not saying that Games & Bill are necessarily "positive" on the AA but it seems LKH could be said to be definitively "negative" on the AA (having read many previous posts) - and I understand his POV on this - the debt is huge.
I was researching this week trying to find some causes for the 20p-ish SP fall (over the last 9 days) - this might be terribly naive - but all I could come up with was Ford's scrappage scheme (old cars crushed, more new cars, less breakdowns, less AA sign-ups?) & the general switch to electric cars. On the latter, I am not convinced: I live near a university-related electric car development site & all I ever see are broken-down electric cars (yippee! Can the AA fix broken-down electric cars in the AI future?!)! Weakly anecdotal I accept.
Well, we're at 167p; my break-even is 186.2828p so I'm seriously underwater - but I don't sell at a loss (pig-headed, stubborn, mis-guided?!) so it's a painful hold; I wouldn't have sold this side of the 2018/19 tax year anyway but I was hoping to hover around 185-190p, see what happens with the half-year results (26 Sept), hopefully new exec., interest rates staying at rock bottom & possibly even hold until the full year results, see what the divi is etc. So no decisions until April 2018, at the very earliest. Hopefully we'll get back to 187p before too long.
Target sell is 250p but if I don't like the lay of the land come April, I will consider getting out at break-even (if poss) & start trawling my nets for a new big fish. I learned my lesson in terms of long-term holds with LBG & RBS - the intention is to stay nimble, not be greedy but to demand a 10% annual return (ha!)
Thank you again, esteemed colleagues. Have a lovely long weekend. I'm off to watch the incomparable "Inspector Montalbano" and dream of living by the sea.
Ciao - Intellectual Amateur (I thought I was Moebius but it was such a long time ago that I originally signed up, so iii must be correct - IA it is!)
By Intellectual Amateur

Re: Is the AA now the DD? by gamesinvestor

  Sat, 26 Aug 2017 17:21:00 GMT
Bill - I see parallel's between the AA and Britvic/Card Factory a few months back.

Both were valued according to the "efficient markets theory-LOL!!!"" and now they are both 41% and 33% up respectively, at least from the day I fell on the green button and unleashed a goodly amount of my wad on both -- 4.6% combined.

The only difference as LK rightly points out is the debt - it's not pretty.
However, the business has been stable for 5 years (hopefully also for the next 5) and during the last three the debt has reduced from £3.3Bn to £2.7Bn -- an 18.2% decline -- slow but steady.
Plus, the AA has 30+% operating margins -- there's aren't an awful lot others that do in reality.

I'm with Woody on this, he's my hero and I'm following his lead on such an excellent selection.

Mind you if the stock drops to 90p as the guy on here has suggested from looking at the goat's entrails, I'm gonna look a right chump.

Ah but he says, knowingly with broad cheshire like grin on his fizzog, I'll be less of a chump than the fund manager who shall remain faceless (I mean nameless) who bought shed loads at 250p and a further Aircraft Carrier load at 385p.

Games -- safe in the knowledge that whatever happens he won't be labelled "chump", but "lesser chump"
By gamesinvestor

Re: Is the AA now the DD? by Bill1703

  Sat, 26 Aug 2017 15:01:00 GMT
"... why does this song from the Jungle Book spring to mind?"

Now now, LKH, just you wait, when the market realises that everything is indeed all tickety-boo under the AA bonnet (!) and starts shooting through the roof, you'll be hopping around like King Louie... "Oo ooo oo, I wanna be like you oo ooo....!"

Or.... maybe not! I did say, I see no reason why it "cannot" regain these levels... I did not say, "will not" - an important clarification, I am sure you agree.

FWIW ... while visibility is low here, my broad hope is to double my money here, on a 12-18 month view. And hope not to lose it all... though this is less likely on that timescale, but after that, who knows?

And in any event it is one to watch carefully in the meantime, on the way up... or t'other way, as the case may be.
By Bill1703

Re: Is the AA now the DD? by LK Hyman

  Sat, 26 Aug 2017 12:04:00 GMT

"I see no reason why 250p - and even 300p or more - cannot be regained in fairly short order"

Hmmmm .... why does this song from the Jungle Book spring to mind?


I wouldn't put MY hard-earned into the AA. That's a real mountain of debt that's sat on the balance sheet. It'll take an awful lot of trips by AA patrolmen on Beezers with sidecars carrying a lifesaving tin of jizzup or a set of spare spark plugs to pay that off.

LKH on the flybridge give me a strong balance sheet every time
By LK Hyman

Re: Is the AA now the DD? by Bill1703

  Sat, 26 Aug 2017 11:21:00 GMT
"... I have no expectation that the AA will regain £3+ territory... but I was speculating on a possible recovery to ... around 250p."

IA - there is not much to add to Games' excellent and comprehensive review of the main business issues, positive and negative. But I would add that I think you CAN analyse both the business and the share price... albeit the latter is always a more difficult, capricious entity to assess. And don't forget, these are always two distinct entities - albeit somewhat related - and no more so than with AA!

So to address your original premise, as above... the market was happy enough to pay 250p for the stock, a mere month ago... and around 300p less than a year ago, and 400p or so within a couple of years. But what has really changed, in fundamental "value" terms?

The sudden dismissal of the EC was an ugly surprise, and the market never likes them... but it is surely 'neutral' in value terms? Of course, we don't know what was said to compel him to lash out, and that might just make a difference... but absent anything relevant there, I actually think it an incremental positive, in expediting a change from what was a sub-optimal corporate governance situation.

You had the accompanying profits warning - and the market definitely hates double whammies! But it was a pretty modest warning in overall impact, and the issues look mostly ones of timing and technical accounting treatment... most importantly, there was no suggestion of deterioration in core trading conditions - if anything the reverse, with confirmation that core membership figures (the real driver of cash flow and value here) have remained stable (actually, edging up) after a longer period of decline.

There has also been little change in the long term outlook for interest rates - absolutely critical to the equity story here. If anything, it has got a bit better... the recent concern over surging inflation leading to higher interest rates has quickly dispersed, and long term rates have actually ticked down (U.K. 10yr gilt yield now around 1.05%, having been holding up around 1.2-1.3% a few months back).

So all in all, I look at the fundamental picture as concerns the AA - over the last month, and the last year, say - and I see little change at all, if anything, arguably a small positive movement. It is largely issues of sentiment behind the recent plunge - and while these can persist, they can also quickly swing. So I see no reason why 250p - and even 300p or more - cannot be regained in fairly short order, with any kind of catalyst for a sentiment upturn.

And given the high gearing, you could be talking about quite a bit more than that, further out... as long as core trading holds up, and as long as the prevailing interest rate outlook holds. A new CEO is both an opportunity and a potential risk - he/she may have their own ideas about the capital structure, dividend policy, etc... but any kind of subsequent period of stability and delivery could be very good news indeed. For the stock first, and business second... always remembering the distinctions between the two, as I think you have to do here - in particular.
By Bill1703

Re: Is the AA now the DD? by gamesinvestor

  Fri, 25 Aug 2017 18:42:00 GMT
" I felt compelled to ask the "unknowable."

Intel -- I think that answers your own question to a degree, it's all a judgement call.

No one knows what's going to happen to the stock price. The only thing you can do is assess the business criteria and decide for yourself if it's a stock you want to buy or sell.
In my view there is no such BS as "hold" "accumulate", "add" bla de bla !!

You are either in or you are out.
The only things that matter is your own comfort zone.
What you can do is weigh up the positives and the negatives and please take absolutely NO notice as to whether Neil Woodford or Uncle Tom Cobbly has bought or sold the stock.
Many of these guys are NOT investing their own money, they are mainly fee collectors and ALL of the risk is on you.
A couple of exceptions of course - Nick Train or Terry Smith.

Positives for the AA :-
1. It's an old and it's fair to say a very recognised brand
2. It has good cash flow at the moment
3. It pays a dividend that is affordable and if you are buying at today's price it's quite generous at about 5.2%.
4. It has 40% share of the market in it's core business "road side assistance"
5. It's conscious of it's debt, imported from the Private Equity Sharks who lumbered it with £3.3Bn's worth -- shouid be a criminal offence of course, but it's still legal.
6. It's paid some of this debt off from cash proceeds to get it down to £2.7Bn since 2014 - slowy.
7. It has a program in place to sell more stuff to it's punters -- batteries/tyres etc
8. The company has a good operational reputation, if of course you take away the CEO punching someone on the chin -- It takes all sorts doesn't it eh?
9. It has 10M corporate customers and 3.3M private
10. It has a profitable insurance business with amazingly 55% of their customers as NON AA customers. What they need is a bright spark to convert all those guys to take AA breakdown cover as well -- can't be that hard can it?
11. The company has uprated it's IT and vowed to make it more efficient and to significantly reduce costs, phone time and time to call out -- we shall see of course.

The negatives :-
1. It has £2.7Bn in debt and a pre tax profit last year of only £100M -- that's a big gap isn't it ?
2. There is a constant chip away at it's business from the RAC and Greenflag who play the packaged product game with banks and insurance companies -- eroding the price of road side recovery/breakdown assistance. but AA still lifted the average price per customer over the last 3 years.
3. The company has the largest driving school -- long term this is dead in the water with driverless cars (I stress very long term), so it's still making a return.
4. The company will have to do a lot of possible expensive training to prepare for electric vehicles, and there is no knowing as yet if they are more or less reliable -- the AA and competition will be hoping it's worse. Today a high % of breakdowns are electrical in nature so it seems.
5. The stock market has a dim view on the AA and the short interest is growing --they could be wrong and often are of course.

On balance, and at this price, I'd say it's a reasonable risk -- I've put a small smattering of my wad in this only yesterday -- so I'm already under water -- so taking any momentary notice of me is indeed a risk in itself.

Games -- If it falls anymore of course I'll have a breadown -- and who will I call? -- Ghostbusters perhaps?
By gamesinvestor

Is the AA now the DD? by Intellectual Amateur

  Fri, 25 Aug 2017 16:53:00 GMT
I'm not a poster (just a reader of posts) but, seeing as you posters are far more experienced & knowledgeable than me, I felt compelled to ask the "unknowable."
How much further has the AA to fall? I am getting worried - my break-even is 186.2828p.
I understand the Private Equity / IPO / Debt / Executive Chairman dismissal issues - taking all that into consideration, I have no expectation that the AA will re-gain £3+ territory - but, I was speculating on a possible recovery to around where it was prior to the EC's dismissal, so around 250p.
Any hope of this? Your opinions would be appreciated, esteemed colleagues.
By Intellectual Amateur

Dragging you over from wpp by Kool Keith

  Fri, 25 Aug 2017 12:52:00 GMT
Also joined Games and Bill in this.

Average cost of 171.19 inc dealing and stamp duty.

By Kool Keith