Shares in breakdown assistance firm AA (LSE: AA) were in free-fall this morning after the company cut its profit expectations and slashed its dividend. The group announced plans to ‘innovate and grow’ its roadside business and accelerate the growth of its insurance business by spending an additional £45m this year.
In order to fund this, the business has had to cut its dividend from 9p to 2p. Payments will be capped at this level until the board is ‘satisfied that profit and free cash flow enable a change in policy’. Additionally, following the investment, profits for the year ended 31 January 2019 are now expected to be in the region of £335-345m compared a predicted £390-395m for the year ended 31 January 2018.
Analysts at Jefferies warned that this drop in profits would result in AA’s earnings per share falling by as much as a third in the current financial year. Investors ran for the hills following the news, with AA shares plunging 21.6pc, or 25.1p to 91.2 at the time of writing.
AA, another favourite firm of seemingly doomed fund manager Neil Woodford, has fallen from 263p over the last year. It was brutally hit last summer when executive chairman Bob Mackenzie was dismissed for gross misconduct following a physical altercation with a colleague in a hotel car park. It is believed that the disagreement was over a planned tie-up with motor insurer Hasting, which ultimately fell through. Mackenzie is taking the AA to an employment tribunal.
Despite investors’ concerns, new chief executive Simon Breakwell – hired in the wake of Mackenzie’s departure – said today’s move will unlock the AA’s ‘full potential’.
‘My review into all aspects of our business, from the bottom up, has further strengthened my confidence about the opportunities ahead of us and convinced me of the positive long-term outlook for the AA,’ he said.
‘These investments, while reducing our short-term profitability, are vital to our long-term success.’
‘I am confident the priorities we set out today will transform our products and service offerings to our customers by creating a truly innovative and differentiated product proposition, which will deliver long-term shareholder value.’
The AA said it expects to remain cash generative in 2019 before generating in excess of £80m free cash flow in 2020 and in excess of £100m per year thereafter.
It is also targeting annual trading EBITDA growth of 5pc to 8pc a year from 2019 to 2023 and said it is confident that all its financial requirements remain well funded.
Author: Daniel Flynn
The author does not own shares in the company mentioned in this article