Its previous ‘buy’ case had been predicated on cost savings and operational improvements coming through, enabling the company to ease the heavy gearing with which its previous private equity owners had lumbered it.
New boss Simon Breakwell has declared that additional investment in information technology will be needed, while previously expected cost savings are taking longer to come through, all of which has prompted Berenberg to abandon its bullish position and cut its price target to 170p.
AA shares currently trade at 154.7p, down 2% on the day.
“While our belief in a longer-term shift from debt to equity remains, we increasingly believe the risk in the near term is for further downgrades to consensus expectations,” Berenberg said.
Calum Battersby, who has taken over coverage of AA at Berenberg, reckons there are further downside risks, in the form of continued increases in the insurance premium tax, stiffer competition as a result of price comparison web sites, and “failings in managing fluctuations in demand for roadside assistance”.
The continued impact of these headwinds has meant that only £28mln of the targeted £40mln n cost savings have come through since 2015, during which time underlying earnings (EBIT) have declined by around 15%.
“We believe these market issues remain, and provide continued risks to the AA’s ability to reach forecast earnings estimates,” Battersby said.