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AA: A sustainable recovery of its own?

Richard Hunter
AA: A sustainable recovery of its own? (Source: iStock)

After a decent start to 2019, our head of markets kicks the tyres after these uninspiring results.

There is certainly a great deal going on under the bonnet at AA (LSE:AA.), although by its own admission there remains much to be done.

One measure of progress is the number of contract wins the company has achieved, with the recent announcement of an Admiral (LSE:ADM) contract adding to recent success with the likes of Lloyds Banking Group (LSE:LLOY), Jaguar Land Rover and Volkswagen (XETRA:VOW).

The roadside business continues to be efficient in terms of successful breakdown recoveries, a core measure for the group, whilst elsewhere there has been a spike of 16 per cent in insurance motor book policies.

Meanwhile, the AA is treading the fine line of continuing to invest in the business whilst realising that the overall numbers are under pressure. As such, a 2 per cent rise in full-year revenue is something of an achievement given that the company is in the midst of a transformation.

Source: TradingView Past performance is not a guide to future performance

Even so, the challenges the company is facing are in plain sight. Competitor activity and regulatory pressures crimped growth, while such a transformation has inevitably slowed the business down, with trading earnings down 13 per cent, adjusted earnings per share 32 per cent lower and pre-tax profit 62 per cent shy of the previous number.

Net debt is being serviced, but nonetheless remains stubbornly high at over £2.7 billion, while the reduction in the dividend, albeit prudent, removes some of the attraction of the stock as the yield has slumped to 2.2 per cent.

It remains to be seen whether the progress being made is sufficient to entice new investors, but in the meantime share price volatility does seem guaranteed. From an initial float price in June 2014 of 250p (let alone a subsequent high of 432p in March 2015), the current level of around 93p gives some indication of the enormity of the challenges ahead.

Even more recently, the rollercoaster ride has continued in a share price which is up 23 per cent over the last three months, down 7% over the last six months and ahead by 12 per cent over the last year, as compared to a 4 per cent hike for the FTSE All-Share.

One element of the mix is unchanged, however - the market consensus of the shares is stuck at a 'hold', reflecting divided opinion on the company's immediate prospects.

*Horizontal lines on charts represent levels of previous technical support and resistance.

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