AA (not) okay!

23rd Nov '20 by mojomogoz

7 comments 643 reads

I wrote about Aa (LON:AA.) here speculating that there was considerable upside...

https://www.stockopedia.com/co...

Well, today I capitulated and sold at c.32.6p. I bought my first piece at c.85p in early 2018 after the change to new CEO and new 'strategic plan' and I bought my last piece at near 15p in covid panic. I averaged a 23% loss on a not insignificant position. In another situation I would have bought more at 15p and be positive today but I only half bought in March/April as the reflexivity around balance sheet and financial market situation was gigantic so assuming sound assessment of 'fundamentals' was more hubristic than normal. And if my view was right then the upside was a lot anyway.

I still believe that there is a lot of value on the table and this is a good, durable and high quality business but with a capital structure that needs fixed...but as its a good underlying franchise the capital structure is fixable.

At 85p I believed that combo of secular persistent low interest rates and slow deleveraging meant that AA was a combined macro and stock position with high embedded optionality. It was uncomfortable but had a valuable role in my portfolio due to idiosyncratic high upside potential.

Once the global yield blip came around late 2018 and early 2019 (a false dawn in growth/inflation expectations!) then AA went down as yield on debt went up so refinancing more costly. I bought some more in low 40s. It was now clear that without reversion to low yields an equity refinance would me needed. Still good upside IMO...with the super upside of slow deleveraging still there too.

Its a tough/galling/ironic that there's been a number of very speculative and questionable equity raises since covid kicked in. Things like companies raising cash so as they have a war chest for acquisitions even when the raiser has a less than certain business themselves (it can be small, rapidly growth etc...but a speculation rather than a durable franchise certainty). The AA is a much safer and value creating candidate for a raise. In my previous post linked above I compared it to Diageo (LON:DGE) and I really don't believe this to be a misappropriation of Diageo's quality.

However, I think the issue is that AA mgt don't want to be public and…

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jwebster

23rd Nov '20

First blush on reading this, thinking when EVs get going won't they have 'smart breakdown' built in as the car chats away to the manufacturer's servers real time? Also manufacturers, Uber, Tesla network et al will try to muscle in on this 'car as a service' platform idea and give this sort of thing away for free to earn engagement. Regardless, my friends use the core AA breakdown cover and speak very positively about it. Someone has to do the last mile.

Old ManFit

Interesting view point, I got one of these Polestar 2 EV's (basically from the Volvo parts bin) and I have the SOS button in it, no spare wheel, no jack and no repair kit. If it breaks down I am supposed to press the SOS button and they sort it all out. If its bad they cart it away and give me a Volvo or similar until I get it back. I havent a clue who does the last mile, but some one has too, so there should still be life in the last mile.

mojomogoz

AA -> great franchise with great future but with crap capital structure. Risk was always high that latter would sink the opportunity in former due to the ridiculous position post flip from PE....and then they handicapped themselves further with incompetent mgt!

Anyway, I agree with view re last mile. I'd add that maintenance and service with EV, car sharing, more reliable cars, greater data, etc is going to move to the customer/vehicle rather than then vehicle to the garage. AA is the business that can garage the UK. Car brands and transport cos (Uber etc) will partner with them for it. Its the super high margin after sales at biz like Vertu Motors (LON:VTU) etc that is at risk from the future...not the AA

Sadly tho I think the PE firms in for them are the financial engineering sort more than growth/development capital so they may stifle AA's opp

jonesj

Would be very inconvenient having a puncture whilst driving to the airport.

24th Nov '20

Extension of deal deadline announced today.

Private equity has public equity tightly snookered and is successfully waring down stockholders and management at AA....aim to make people desperate to have the pain over and will grasp the lowball 35p.

The only route to greater public equity value now is to fire the CEO (right-ish guy operationally but he's given up on representing interests of shareholders and wants the dead embrace of PE) and some of the useless BoDs. There is a shareholder base that could embrace such thorny activism and get the ball rolling in Albert Bridge (20%), Davidson Kempner (15%) and Gary Klesch (10%)...but the announced 16% pocket for someone else to hold equity in private AA hints that one or both of last two have been picked off by the PE guys. And I'm not convinced Albert Bridge have the gumption to drum up other shareholder and/or take their own holding up.

An RNS in coming days showing that AB (and maybe others) have taken their shareholding higher would indicate I'm wrong and a fight is on.

AA trades at 3x EV/sales. This not expensive. Diageo (LON:DGE) is on 8x. Arguably AA has better margin and growth outlook. On margin there has been relatively high investment expensed under recent management to support both roadside and insurance that doesn't have immediate return. Expansion of roadside and insurance capabilities can see high sustained mid to high single digit revenue growth.

The AA remains a great franchise and brand inside the wrong capital structure. With willingness on behalf of mgt and BoD it is not too hard to partially repair the capital structure without destroying value. Even just reducing debt by £500m if it were all the high yield B notes would have a significant impact on capital structure sustainability and leave open a path for a bit more debt for equity swapping BUT a lot of long term debt deleveraging....this DIY deleveraging path for high margin and modest growth biz is very lucrative for shareholders.

Clearly, based on events, I was ahead of myself to hold equity in AA and so paid the price. However, if it doesn't succumb to the chilling PE embrace and finds the spirit to live on there can still be a superb buying chance.

The high debt levels even impact on pricing strategy. Lowering or simplifying roadside pricing so as to make greater competitive advantage of AA's sunk capabilities and service is hard when every year mgt must be super careful on maintaining covenants.

Momoko Miyamoto

25th Nov '20

I don’t think AA has a sustainable business model. It just scrapes enough profit to service its debt interest and pension deficit by fleecing ignorant retail customers. The same service is available a lot cheaper through green flag or packaged bank accounts e.g. Nationwide flex plus.

26th Nov '20

Beauty is in the eye of the beholder...you need a vision check ;)

For sure the outward attire and demeanour is dire...but underneath is a goddess.

Its all academic anyway as soon will not exist in public...I guess that in 5 years from now the AA is dominant and desirable with a service offering beyond the mere 4th emergency service call out. Equity holders have been denied the opportunity. Fixing the clothes would not be that hard if the BoD/CEO could be arsed and shareholders game enough.

AA (not) okay!

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Mojomogoz

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