Admittedly there has been a series of earnings downgrades from AA since its IPO in 2014 and the news of the dismissal of its executive chairman Bob Mackenzie that accompanied the trading update won’t have helped even though the dismissal does not disrupt the investment case. Indeed some aspects of the trading update such as membership numbers and cash generation were encouraging.15 September 2017
The AA provides roadside assistance, motor and home insurance and other driving services, and is seen as Britain’s fourth emergency service, by many of its more than three million members and ten million business customers. Formed more than a hundred years ago by a few driving enthusiasts, keen to represent and protect motorists and their interests, the group has grown in scale and purpose, at a rate which reflects the rapid evolution of the automotive industry.
Initially a membership organisation, its members voted to demutualise in 1999 and become part of Centrica. It was acquired by private equity in 2004 and returned to the stock market in June 2014.
Investment case summary
We have been invested in AA since its IPO in 2014, initially attracted to a business with many appealing characteristics including strong cash generation, a well-recognised brand with strong customer loyalty and a dominant position in its core market. Meanwhile, following years in private equity hands, there was an opportunity to invest for growth and, by reducing the level of debt on the balance sheet, transfer value from debt holders back to shareholders.
After a promising start, the investment case has not played out as originally anticipated. The original management team failed to successfully execute its plans to transform the growth prospects of the business and make a meaningful dent in the company’s debt burden. This has resulted in a series of profit downgrades and a prolonged period of share price underperformance.
Nevertheless, we have maintained the funds’ exposure to the shares, believing that the share price has persistently, and increasingly, undervalued the intrinsic worth of the business. Despite the downgrades, it has made some progress in recent years, including improved brand awareness, better customer retention and growth in new business, and it retains many of the characteristics which initially attracted us to the business.
A new management team was appointed in 2017 and has announced a clear and compelling strategy to return the business to long-term growth and restore the company’s reputation with investors.
|Income Focus Fund||0.93%|
|Equity Income Fund||0.75%|
As at 30 November 2018
|Themes||UK domestic exposure|
In my view AA is a very high-quality utility-like business which has been around for a long period of time. It has a great consumer reputation and it is viewed as Britain’s fourth emergency service. I believe that AA has suffered from underinvestment and from having too much debt on its balance sheet. The business has now IPO’d and it is in a very good place now to start to capitalise on the strength of the brand.24 July 2014