Meanbugger
05 Feb 2018
Re: Reasons to be positive I don't have a position in AA but I'm interested in why it seems to be going wrong. Obviously very high levels of debt and a balance sheet with net liabilities don't help. Looking at broad structural trends, car insurers now offer breakdown cover for less than the cost of AA membership. Cars are becoming more reliable with better batteries meaning starting problems are rarer. Maybe some people think they don't need breakdown cover as they used to in the past. Although the AA has done well to maintain membership levels, it is difficult to see much long-term growth.My last call out to the AA was when my exhaust fell off. Being a single male in the car and having parked safely I was low priority so the ETA was about 2 hours. While waiting patiently I had a knock on the window and a passing motorist had stopped and offered his assistance. Within a few minutes he had made the car driveable to my immense gratitude. If motorists are helping each other out like this what hope does the AA have long-term?
kolwezimundele
01 Feb 2018
Re: Reasons to be positive Dividend cut = further significant share price collapse = inability to raise equity at reasonable price + potential breach of covenants???? Madame at Glaxo has held dividends for 2018 - perhaps AA will do the same for above reason. OTOH, at least 4 major higher-yielding UK dividend payers (take your pick.....) have cut/removed their dividend in the past year, so if AA cuts it is only following a trend. A huge number of reasonably-sized popular shares are in a state of price collapse (and that's ignoring the obvious basket cases - Provident, Capita etc) - National Grid, Babcock, Glaxo, IMB and here, AA to name some of a long list. Beginning to think the only place for cash is cash (and, of course, RDS)....
Bill1703
01 Feb 2018
Re: "On balance, I would be interested to read your reasons to be negative..."GG - I think you have answered your own question! It is the debt... first and last really.My original 5-second view was, "this is going bust". Then my 5-minute view was... "interesting elements here, may still be going bust, but..." And then my 5-hour view (maybe not quite, but a lot more digging around) was... "very interesting opportunity, could be substantial upside... but intrinsically high risk." My fairly modest position resulted - but I was clear from the outset (to myself, as much as anyone else who cares to listen) that it was a "special situation", and highly speculative.The current debt load could easily prove unsustainable, if (a) interest rates shoot up faster than currently expected, (b) the debt markets take fright and demand much higher interest rates, (c) the core roadside business takes a dive, and its prodigious up-front cash flows with it. I would stress, there is not much sign of ANY of these currently (though maybe a bit more (a) than others, albeit only relatively). But they are all feasible scenarios, and while they have been paying down debt steadily, the relatively modest rate (c.£0.1bn pa vs. net debt c.£2.7bn) means it is an intrinsically long term story, and the longer the horizon, the greater chance for these risk areas to crystallise.Further risks... (a) The dividend is cut or passed, to accelerate debt paydown (as per previous posts, quite likely, and not necessarily a SP negative, in itself). (b) They bite the bullet for a significant early equity raise, which at anything like the current SP could be highly dilutive to current holders (less likely IMHO, no major debt maturity to force this near-term, and a moot point as to whether it is already in the price now). It is fairly obvious that the common factor to all of this is the debt, and therefore the original short answer to your question. And difficult to argue with anyone that looks at it and says "no thanks"... as with any other stock, no-one has to buy it, there are plenty more fish in the sea (albeit rather fewer credible fish, and decidedly choppy sea). But it is the fact that the market consensus is doing just this that creates the opportunity, speculative as it is. In short, it is clear to me that there is a significant disconnect between the equity market view and the prevailing debt market view. History also tells us that such disconnects do not last for too long (albeit they can prevail for some time). It is, however, somewhat less clear exactly how this disconnect gets joined up again... hence the wide range of potential SP outcomes!
GalileoGalilei
01 Feb 2018
Bill, thank you for your post. On balance, I would be interested to read your reasons to be negative.GG....loss crystallized
Bill1703
01 Feb 2018
Re: Reasons to be positive "Am I right in thinking that AA could carry on paying a dividend, perhaps at a reduced level whilst still making inroads in to debt reduction ? I assume so..."Soi - it is a complicated question! They certainly COULD, as far as I can see... they have, for a while now, paid a decent divi while paying down debt at the rate of c.£100m a year. Driven by the strong free cash flows from the core roadside business - FCF cover has been 2.2x each of the last two FYs, and even though FCF is likely to dip (moderately) in the year to be reported (largely due to temporarily higher IT spend) cover will likely remain healthy by any comparative standards.But WILL they? And lest we forget, a dividend is always a "choice" rather than economic inevitability. The debt markets seem relaxed enough - they have been able consistently to refinance existing debt at steadily lower interest rates, and there are no major debt maturities until 2020 (I think). There ARE some restrictive debt covenants which limit dividend terms, though my understanding was that they are currently nowhere near to breaching these (though this might require further digging, and I note the recent Barclays report was casting some doubt on this).But it is the equity markets that are taking fright now - not that the (unique) capital structure is anything new, and it didn't seem to be a problem when the SP was up at 300-400p. Sure, interest rates and bond yields are on the rise (finally)- but hardly dramatically. However, there is a review ongoing from the new CEO, and the SP is now putting some pressure on him to address this fairly decisively... the market is probably reacting to this more than anything else IMHO, it is the way of such things - and the kitchen-sinking you often see (just yesterday, with Capita) will be foremost in market minds. This is the problem with new CEOs - they feel they have to justify their existence (and huge pay packets) by changing things, whether they need it or not. So it is currently a judgement call as much as economic assessment... and as I said before, I take seriously the recent Barclays conclusions, not least as they came across as remarkably (almost, suspiciously) well informed. They could, of course, be proved alarmist - analysts are known for flying kites which may never, in the end, take wing. And the new CEO could "choose" to carry on "as is"... though this is often (rightly or wrongly) the toughest call to make, and one which demands careful justification.So current conditions are pushing for a "decision", irrespective of the fact that the fundamentals haven't really changed. In an ideal world, an equity raise would be the preferred choice - but the depressed SP hikes the cost of this significantly, and it'd be even harder to do if you drop the divi at the same time (this is NOT a Capita, still less a Carillion). So cutting the dividend - significantly, and possibly entirely - may be the least bad option, and can be attended by a refocused strategic commitment to more rapid debt paydown as the prime priority, etc. I can write this script myself, easily enough... we will have to wait and see if the CEO decides to do the same!
GalileoGalilei
01 Feb 2018
Re: Reasons to be positive Sorry, I just can't be positive about this stock at the moment. Debt levels are high and this one is being increasingly shorted, now at circa 8.6%. Not good at all.GG.....out
soi
01 Feb 2018
Re: Reasons to be positive Good Morning BillThanks for your view, logical as usual.Am I right in thinking that AA could carry on paying a dividend, perhaps at a reduced level whilst still making inroads in to debt reduction ? I assume so.Link to a site I sometimes use for a quick snapshot of financials :[link] are predicting a dividend cut but also a reduction in debt.I sometimes have doubts about their accuracy, if you get a chance could you take a look and give your view.If too busy no issue.ATBsoi
Bill1703
31 Jan 2018
Re: Reasons to be positive "... fears of debt levels and dividend being cancelled i`m hoping are priced in at this level...looks quite an extreme valuation now and have bought more ..."Yes, the market being spooked again today by Capita, and then looking at the AA - also with a new CEO review ongoing - and putting 2 + 2 together = the next dividend cut/suspension and/or equity raising story.Very different core businesses, of course, but it's not exactly implausible. As for reasons to be positive - one main one, really, and still the same as before... any reasonable valuation of the core business (on a standalone, debt-free basis) would be more (probably, considerably more) than the sum of the current equity value and the current net debt. But easy to see why the market is recoiling, just at the moment.How much to worry about one of, or both, losing the dividend and an equity raise? I don't think this has ever been a "yield" story - not since the dive into distressed territory anyway - and passing the divi would at least allow a more rapid paydown of debt (as per recently highlighted Barclays report)... as such, could even be taken positively? The argument for keeping it was to reward the patience of equity holders while they gradually pay down debt, but at the current SP, they are no longer getting value for the commitment (and even though it is very healthily covered by FCF).As for an equity raise - I always thought this was the plan all along, but of course, they'll likely now be wishing they had bitten this particular bullet at 300p or more, rather than down here. You can argue the toss about whether they need to, yet, with no major debt maturity for another 2-3 years (from memory), and with FCF still healthy - and I would again cite Barclays, who doubted whether the amount they may need to raise (eg. to bring leverage down to "normal" levels) would be practical. Much may depend on the new CEO, and his current "review" - if he feels it is inevitable eventually, how honest and/or honourable is it not to admit this up front?And again, while an equity raising at this price would involve significant dilution, we already have a deeply discounted equity valuation - so it may already be (at least) in the price, as Contrarian suggests, and it could make the core AA business story (stable, highly cash generative) investible again, for many investors (both private and institutional) who feel they just can't touch it for now.Will be interesting to see how it goes - FWIW, I am with Barclays (and their report did feel remarkably well informed), losing the dividend is one obvious route, and could be seen as the lesser of two evils - for both the company and equity holders. I also agree with Barclays, even on this scenario, this is worth quite a bit more on the SP - but more than ever, you have to be clear on what kind of story this is, ie. speculative!
contrarianstyle
31 Jan 2018
Re: Reasons to be positive fears of debt levels and dividend being cancelled i`m hoping are priced in at this level...looks quite an extreme valuation now and have bought more
kolwezimundele
31 Jan 2018
Reasons to be positive As with a large number of shares on the LSE ATM, this is turning out to be a bit of a dog's dinner (down about 50% over 52 weeks?).Could any current shareholders indicate why they are holding on, and what they believe the catalyst might be for recovery? Looking for reasons to invest, but....
TooBigToFail
31 Jan 2018
Re: share price support and resistance l... Bought yesterday. Who’d of thought a falling knife could cut like that!
paul1945
30 Jan 2018
Re: share price support and resistance l... I,ve been watching for sometime did buy & sell at a small profit lucky. I bought when director + 100k really hope u make a profit.
Jedi Council
30 Jan 2018
Re: share price support and resistance l... Due to update the market next week. Dipped my toe into these this afternoon. Feels a bit like catching a falling knife!
emisbod
29 Jan 2018
Re: share price support and resistance level... Hah. Down to 143. Can't help but feel the stock is massively oversold, given that things were sailing along quite nicely till the CEO biffed someone. Was he so important to the company that the debt position suddenly became an issue? It is a good brand so longterm worth holding IMHO but certainly doesn't seem to be in for a significant rise very soon, unless there is really good news in the next trading update.
soi
23 Jan 2018
Re: share price support and resistance level... Good MorningJust a general chart TA comment.The recent drop broke the first of 2 support levels that I had for it. ( 158.7 )The 2nd lower one at 149.5 managed to hold.I sometimes get a tad nervous when the sp threatens a lower support level, fortunately that held, just and was glad to see the little rise yesterday.I am trading it, both with shares and SB ( spreadbet ) long.Managed 1 share tranche sell yesterday, minor profit.3 share tranches remain as well as 6 SB longs.It is not proving easy at all.I do still rate it for long term and if I can get my trades to work ( need a further rise for that ) I plan to retain 1 share tranche as a LT investment/income provider.ATBsoi
