I have no doubt you are all aware of the AA (The Automobile Association in the old days) - after all, it is one of the Top10 most recognised Brands in the UK. I won’t dwell on what they do, but I will point out a key fact - 90% of their revenues are from Roadside Assistance and therefore incredibly reliable and predictable. The other 10% is from Insurance and I think there is a tad of travel in there somewhere.
Partly this is because the AA has been in the hands of Private Equity alongside Saga for many years - it is only recently that the Directors led an IPO, floating at something like 220p.
On first glance, it is easy to say “look, it’s been loaded up with Debt by the Private Equity boys and this is a joke” - but that would be a big mistake.
Yes, the debt is huge - but people fail to realise the Debt Dynamics here - i.e. how the debt is moving over time.
I cannot talk much about this in a Public Forum but I am very close to this company. I have seen some interesting projections from Analysts about how the debt will get paid down by the huge and predictable cash flows from the Recovery business and over time the Debt will, in effect, convert into Equity (that means my shares !!!).
There is no doubt that the debt fears have been holding this back and the p/e multiple reflects this. However, on a projected EPS of 32.8p for 2015 (the Current Year) they are on a p/e of 10 on the 331p I paid this morning.
Looking out to 2017, the prediction is for EPS of 35.2p - this gives a p/e of 9.4 and I think a good argument could be made that these earnings predictions look on the light side.
There is no dividend at present (good, we want that debt paid down) but they will pay a tiny one starting in 2016 and this should slowly grow as Cash is diverted from paying down debt to giving me a dividend !!!
I think you could justifiably put this stock on a p/e of 15 - the Brand alone justifies this and as the debt comes down the p/e should rise. On this basis, a sensible target for maybe 3 years time is 500p. That’s a reasonable upside for me - 34%.
Obviously the Debt is a concern - but the reliability of the cash flows is near perfect. If anything, the risk is that the Director’s will be slow to capitalise on the AA Brand, but even without this, just a reduction of debt and a more sensible rating for such a Quality Business makes my target achievable.
As you can see, it is a lovely clear uptrend channel since the IPO, and we actually broke to a New All Time high today. On the lower chart you can see in the bottom window we are about to get a MACD cross. Lovely.