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


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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