AA - what happened in 2008

All,

Please refer to our analysis here. 

Below is a historical perspective of the company and some empirical evidence of our stance. 

In the current environment, it is not surprising to see the AA Class B bonds trade off, but we are surprised at lack of any real floor to them.  Currently quoted in the mid-60’s, the bonds have traded off 25pts+ since end of January.  We had hoped that the release of results on the 31st might provide some stability to the name, but due to FCA guidance, the results are pushed back by two weeks.  (The AA will however release a trading update on the 31st.  Perhaps wishful thinking, but would suspect it is unlikely to be drastically negative, as that would have prompted an earlier release.  

The Company remains highly leveraged, at 7.9x through the Class B notes. However, we have looked at the reported revenue and EBITDA for the period 2008-2011 and the following stood out:  

The AA was privately owned by Private Equity until it was re-listed in 2014 so numbers are difficult to attain prior to that.  In addition, it had been merged by Private Equity with Saga and was already considered over leveraged in 2007/8 (8x post merger).  But notwithstanding that, the divisional results are as follows:

As we can see from the above table, Roadside Assistance in the UK was stable, and growing over the period 2009-2013.  (2009 numbers are 11 months of 2008, and January 2009).  But also interesting is the AA Ireland. Ireland arguably suffered worse in 2008 than the UK, and the profitability and Revenue was stable over the period of time.  

We do however note, this Covid-19 is different and with social isolation and government advice for limited travel, renewal rates might take a hit.  It should be noted we were expecting a recovery of growth of membership numbers from the AA and the dividend of 2p per share is likely to be abandoned in the current environment (small, £12m in the overall context).  But the reason for the trade was an expectation that the Company was going to focus on refinancing of the Class B notes, now the extension of part of the Class A’s had concluded in early February.  Peel Hunt have/had a mandate to purchase back Class B notes.  At current levels, mid 60’s, it is very attractive to Company from share point of view.  

We are disappointed with current levels, but consider adding to our position.  


Tomas