AA plc (LON:AA.) will continue to face operational challenges in its roadside assistance division in the near-to-medium term, according to Credit Suisse.
Shares in the roadside recovery services company fell 6.5% to 188p in afternoon trading as Credit Suisse cut its rating on the stock to ‘underperform’ from ‘neutral’ and lowered its target price to 175p from 235p.
Last week AA fired executive chairman Bob Mackenzie with immediate effect for “gross misconduct”, providing no further details. The Daily Telegraph reported that Mackenzie was dismissed after he lashed out at a male colleague at a hotel bar.
READ: AA shares tank after ousting executive chairman Bob Mackenzie for gross misconduct
His departure was announced alongside a first half trading statement, which revealed business customers in 2017 have continued to "decline marginally" to 9.9 million from 10.1 million a year ago
Paid members, however, rose to 3.4 million from 3.3 million, despite new transparency disclosure and the 2% increase in insurance premium tax implemented in June.
AA said the first half was hurt by of “erratic work load patterns on an inherently fixed cost base”.
AA hit by FCA rules and higher taxes, Credit Suisse notes
Credit Suisse said while growth in paid members remained positive, it noted the decline in business customers and highlighted a rise in insurance premium tax and the Financial Conduct Authority’s new requirements to increase transparency of renewal in general insurance markets.
It believes that a solution to the “inherently unpredictable nature” of call-out demands for roadside service is unlikely in the near-term.
“Consumer discretionary spending in the UK also continues its decline, presenting further headwinds to membership growth, in our view.”
New chief executive seen as positive in the long term
However, in the longer-term it sees improved governance following the change of the chief executive.
Former Uber Europe boss and Expedia founder Simon Breakwell, a non-executive director, has been appointed as acting chief executive. Fellow non-executive director John Leach has been appointed as chairman.
“We remain cautious in the nearer-term of the potential for a new leader to undertake their own strategic review and spend further on the delayed customer relationship management transformation project,” Credit Suisse said.
The bank cut its earnings per share estimates for fiscal years 2018 to 2020 by 7% to 10%.