AA’s new direction puts shares into reverse

Company lost 30 per cent of its market value after announcing plans to slash its dividend for this year and next.

An AA recovery vehicle: AA Ireland is not part of AA plc, having become a separate company in 2016.

An AA recovery vehicle: AA Ireland is not part of AA plc, having become a separate company in 2016.

 

The UK’s best-known provider of car-breakdown cover is itself becoming a little accident-prone.

AA shares plunged the most on record on Wednesday after the 113-year-old roadside recovery and insurance firm said plans to generate growth among younger drivers would come at the expense of profit and dividend payouts.

The company, which fired executive chairman and director Bob Mackenzie in August, will boost investment in smart technology aimed at predicting breakdowns before they occur and target millennials through a sharpened focus on mobile applications, its new chief executive officer Simon Breakwell said in a statement.

AA Ireland is not part of AA plc, having become a separate company in 2016.

The AA lost as much as 30 per cent of its market value after announcing plans to slash its dividend for this year and next.

The company also forecast earnings of £335 million to £345 million in 2019, which is about 12 per cent below the market consensus, according to analysts at Morgan Stanley. “The biggest problem we have is that we have not grown as quickly as we should have, for a number of years,” Mr Breakwell said in an interview after the update.

Closest competitors

The AA’s closest competitors also haven’t been spared, he said, adding that the premium end of the market has struggled to keep up with changing trends among the younger demographic. While “young people want everything to be done through their phones”, the need for AA’s services hasn’t faltered, he said.

“People still break down at the side of the road, and that counts for young people as well.” The new strategy should deliver significant incremental revenue and earnings in the medium-term, Cenkos analyst Sandy Chen said in a note. The stock is “worth the near-term investment, in our view”, he added.

The AA removed Mr Mackenzie with immediate effect for “gross misconduct” in August, with the shares falling more than 60 per cent in the aftermath. Mr Breakwell was given the job on a permanent basis in September.

The company held talks last summer with Hastings Group Holdings over a possible combination of the companies’ insurance businesses, though the sides ultimately failed to reach a deal.