The AA share price continues to breakdown – what will it take to rescue the firm? (AA)

By Richard Mason

With such a deep share price decline over the past few years, well-known British brand, The AA (LSE:AA) has no doubt appeared on the radar of many value-seeking investors. Sadly, for long-term holders It’s been a one-way journey south since the firm hit an all-time high of £4.30 in its first year on the London Market. Four years later, at just 57.5p per share, the Automobile Association now has a valuation of only £365m. Not much for a company with operating profit of £219m in FY2019. The problem is of course debt. The AA is carrying a £2.7bn burden – more if you add in £218m pension scheme liabilities – and it’s not shifting at the moment.

Like a Toyota Aygo pulling a 6-berth caravan, the firm is struggling to make headway. Hefty finance interest and costs currently total £167m per annum, and that figure has remained the same for the past two years, furiously eating up cashflow.

Operationally, the company isn’t in too bad shape at all. Breakdown membership has wavered slightly and sales of insurance policies were up 16pc year-on year, but what the company desperately needs is something to notch it up a gear. The company is seeking innovation to achieve this, with the roll out of a new premium service called ‘Smart Breakdown’ now underway. It’s a new tech approach where the name of the game is predicting and preventing breakdowns, and I’m sure we all agree prevention is better than cure.

As a keen chart-watcher, I thought there might be a technical play to be had in spite of the poor fundamental outlook. Unfortunately, the AA’s share price chart offers no comfort with little in the way of support.  The share price is again in new territory with no respite in sight with the only trendline worth noting suggesting the next support could be in the 30s.

If the AA can begin to break the back of that debt pile, then today’s share price offers great value but the concern is timescale. The longer you have strangling debt around your neck, the greater the risk. As the discretionary spending power of consumers continues to be squeezed, and markets potentially run out of steam, the last things a company with so much debt need are a recession or interest rate hikes.

The majority of the AA’s debt has been pushed back to 2022/2023 so the firm has some time to implement its rescue plan. It would prudent to give this ship a wide berth until it shows signs of turning.  The stock has been a shorters favourite for some time, with current declared short positions of over 0.5pc currently standing at 10.5pc. If and when it shows signs that it can tackle the debt mountain the company’s price will recover quickly.

IMPORTANT NOTICE AND DISCLAIMER

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

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