AA - movement in the equity - now worth < £100m

All,

So how could the AA be affected? Below is a discussion of the main threats and their likely impact.
1) Current management statement: not impacted “materially” by the outbreak of Covid-19
2) Roadside: Existing customers cancelling: The sector is subject to a price walking inquiry. The higher prices on long-standing customers mean that the company is making losses on new customer acquisitions and profits on old customers. The majority of cancellations should likely come from younger customers with less stable financials. Thus a slight mitigate here. Also, contracts are annual and only 1/12th gets to make a decision in any month.
3) Roadside: Slowing new customer acquisition: As per above, fewer loss marking new customers. Offsetting both the slow acquisition and increased cancellation rates could be a shortening of holidays in the UK to make up for the lost time, as well as an increased bias / need to spend those holidays in Britain, thus travelling by car, not aeroplane. 
4) Roadside: Overcapacity: The result of higher cancellations and slower acquisition (individually marginally profitable or not) could result in overcapacity. Roadside assistance companies however can manage their cost base by increasing the rotas for their drivers and reducing their number. Vehicles are on 4-year leases, which means they take 4x as long to run off as customers do - if all customers chose to leave. If “only" one in 4 customers leaves, then vehicles as well as front-line and call-centre staff and 3rd party services are largely variable. Both are scaleable with breakdown attendance / policy numbers. 
5) Insurance: Lower Sales: Probably a very difficult business right now. Quite variable cost. Thankfully the underwriting only contributed £10m p.a.
6) B2B: Lower car sales: Customers are likely to seek some extension in contracts for lower cost to make up for the 2 months (maybe more) of not using the service.  But difficult to quantify.
7) Driving School: Lower activity: Fixed, but instructors are on agency.

So all together, the financial statements roughly work in that the 35% EBITDA margin is predominantly variable and the remaining costs incl. Tax CapEx, lease payments (drops if vehicle leases are supposed to run out) and interest are fixed. 

With no competitor able to pounce on deteriorating service standards, the AA can (as it has in the past) overcompensate and ensure its cashflows continue to break even. Following the cut of its dividend, the AA’s market cap has slipped under £100m. So it's not easy to escape the usual disposition bias and proclaim that its therefore cheap. But it is beginning to price like an option. 

Wolfgang