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AA posts sharp fall in profits after cold weather leads to more callouts

Last updated: 19:51 26 Sep 2018 AEST, First published: 16:51 26 Sep 2018 AEST

AA
AA memberships fell by 2% in the first half

Breakdown and car insurance company AA PLC (LON:AA.) posted a 64% slump in first-half profits as bad weather and a “pothole epidemic” led to a higher number of callouts.

In late morning trading, its shares plunged 10.7% to 106.65p. 

READ: AA stays in low gear as cold snap prompts rise in breakdowns

Pre-tax profit in the six months to July fell to £23mln from £64mln a year ago while revenues edged up to £480mln from £471mln.

AA memberships declined to 3.25mln from 3.32mln last year, with average income per member up 2%, broadly in line with inflation, to £159.

Trading EBITDA, the company’s preferred measure of profit that excludes exceptional costs, dropped 17% to £161mln. Nevertheless, AA said it was on course to meet its previous guidance of £335mln to £345mln for the year.

In February, the company lowered its full-year forecast due to higher spending related to its plans to overhaul the business.

The group wants to create a larger insurance arm and become a technology services provider with smart boxes that alert a driver to potential breakdowns before they occur.

AA has been investing in an app and its Car Genie digital device, which is installed in its members' cars and detects potential motor problems.

AA hit by higher costs, pothole epidemic and cold weather

An increase in costs related to the restructuring weighed on profits in the first half. The company also experienced a 15-year high in the number of breakdowns it serviced during the period due to the colder months earlier this year and potholes.

To meet the higher demand, the company had to call on third-party patrols to help with callouts, which rose by 8% to 1.9mln in the period.

However, AA achieved higher roadside sales of products and services to help drivers cope with the cold weather.

First-half results meet AA's expectations

The firm said its performance was still in line with expectations.

"The first half of FY19 has seen exceptional weather conditions, from extreme cold and snow in February and March to the hottest summer in recent memory, with the severe winter also creating a pothole 'epidemic' on the UK's roads,” said chief executive Simon Breakwell.

He added: "We are making good operational progress across our roadside and insurance businesses and firmly believe that we have the people and strategy in place to unlock the full potential of the AA and crystallise long term value for our shareholders.”

An interim dividend of 0.6p was declared, down from 3.6p last year. 

Liberum cuts target price 

Liberum maintained a 'buy' rating on the stock but cut its target price to 130p from 140p. 

The broker also lowered its estimates for 2020 fully diluted earnings per share by 17% to 15.5p to be more in line with the median consensus forecast of 14.7p.

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