AA profits fall into a pothole as roadside repair firm blames Beast from the East
Bad weather sent AA profits crashing in the first half of 2018, the roadside recovery firm said today, sending its share price down over four per cent.
The figures
Pre-tax profits fell 64 per cent year on year to £28m, with revenue growing just two per cent to £480m, fuelled by the AA’s roadside and insurance businesses.
The Beast from the East caused more crashes among members, the AA said, leaving engineers with their work cut out for them.
Earnings per share fell accordingly, down from 10.5p per share for the first half of last year to 3.8p for the six months ending July.
However, the car insurer said its financial performance was in line with expectations, seeing cash conversion at £168m while it remains on track to achieve its full-year capex guidance of £105m.
It also slashed its pension deficit by £154m to improve its balance sheet.
Why it’s interesting
This year’s harsh winter left AA contending with plenty of potholes, leading to a 15-year high in the number of breakdowns it attended.
But the business has struggled to grow at the same rate RAC has enjoyed, which upped revenue by £22m in the first half of the year compared to AA’s £9m.
With roadside business retention down one per cent, and membership down two per cent, AA managed to hike up income from business customers by five per cent, renewing key customers like Jaguar Land Rover and Volkswagen and winning a three-year contract with Arval.
Its insurance arm fared better, with motor policies growing seven per cent to 659,000, and the firm believes it will return to growth in the next financial year.
What AA said
Chief executive Simon Breakwell said:
The first half of the fiscal year has seen exceptional weather conditions, from extreme cold and snow in February and March to the hottest summer in recent memory, with the severe winter also creating a pothole epidemic on the UK's roads.
All this led to a 15 year high in the number of breakdowns we serviced. Against this backdrop, I am extremely proud of our achievements and to be reporting results in line with our guidance as we continue to build resilience throughout the business.
We are making good operational progress across our roadside and insurance businesses and firmly believe that we have the people and strategy in place to unlock the full potential of the AA and crystallise long term value for our shareholders.
What analysts said
Richard Hunter, head of markets at Interactive Investor, said the results were proof of "slow but steady progress".
“In terms of its balance sheet, the refinancing which it has organised and the notable reduction in the pension deficit are positive, although net debt remains stubbornly high at some £2.7bn," he said.
"Another casualty of the recovery plan has been the dividend reduction which, whilst prudent, removes the incentive for investors who are not being paid to wait as the transformation unfolds.
"As AA returns to profit, the difficult decisions which are currently being undertaken could well bear fruit. In the meantime, the stock remains one which for the moment provides more questions than answers."