Share watch: Debt-laden AA finding the long road back to recovery
It is hard to believe that the number of cars on the roads of the Republic 50 years ago was less than 350,000. The number last year was pushing smartly towards the two-million mark. That's double what it was a mere 20 years ago.
Our national love affair with the motor car has seen a lot of cultural changes. One of these relates to the status on the highway of the Automobile Association (AA). When cars were fewer in the 1940s, 1950s and even later, a feature of the nationwide driving experience was the presence of a uniformed AA man with a peaked cap astride a sturdy motorbike who respectfully saluted any vehicle he (it was usually a he) met which sported an AA badge on the front bumper. Such 'old world' courtesy is long gone, but then the AA is a different creature to the one it once was.
The AA was set up in Britain in 1905 to combat unfair police speed traps and fight for the interests of motorists. Today, it employs 7,800 people and provides breakdown services, insurance, driving lessons, motoring advice and AA traffic reports.
Owned by its members until 1999, it demutualised and was immediately snapped up by the UK gas supply company, Centrica plc. Most analysts were surprised at the acquisition between a roadside service company and a gas concern. Five years later, Centrica accepted it made a mistake and sold AA to two private equity firms. There was nothing 'old world' or courteous about these new owners. They axed 3,000 jobs, ended AA services after midnight, cut back on training and investment and creamed away vast profits. Hiking debt levels to £5bn (€5.7bn); they floated the company in London three years ago.
The present AA plc operates three divisions; roadside assistance, insurance services and motor services. AA (Ireland) which was historically part of the AA group was offloaded in August last year to an investment group Carlyle Cardinal (Ireland). Today the Irish operation with 450 employees is Irish owned, managed and focused.
AA is the biggest roadside assistance service in the UK with 40pc of the £1.8bn (£2bn) market. This business has the advantage of high barriers to entry with no new entrant for almost 40 years. The division has 15 million members, 10 million business members, the remainder being personal members. Its roadside services deliver revenues of £742m (€847m) and handle an average of 10,000 breakdowns each day.
AA insurance provides motor, home, and travel insurance and contributes £130m (€148m) in revenues from its two million policies. This business is commission based, the AA acting mainly as a broker.
The company is also the leading provider of driving lessons through its AA Driving School and the British School of Motoring.
With 2,600 instructors it generated revenue of £65m (€74m) last year. A new initiative last year was the re-launch of its AA-branded financial services. This business will offer credit cards, loans and mortgages on foot of a 10-year exclusive arrangement with surprisingly, Bank of Ireland.
Today the AA is in a recovery phase after years of underinvestment. Its turnaround strategy is working, although sales at £935m (€1bn) are static, but with pre-tax profits of £100m (€114m). Selling its Irish business last year was part of the plan for dealing with the huge legacy debt. Fresh investment in marketing and digital platforms hopefully will pay off and should help make inroads into its high debt pile.
The company's modest cost reduction programme is on target and the important roadside assistance business is showing recovery. The continued pressure on its insurance business masks improvement in its motor insurance. Cash flow showed an improvement and was positive at £42m (€47m) after a significant loss in the previous year.
The shares launched three years ago for £2.50 (€2.85) rose to £4.16 (€4.75) in the same year, today they trade at £2.40 (€2.74). While the AA is on the road to recovery after a torrid decade and is even paying a small dividend, its debt pile will need to be a lot smaller before I'd invest.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.