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AA wins contract with Admiral after deals with Lloyds, Volkswagen and others boost revenues

Last updated: 10:04 03 Apr 2019 BST, First published: 09:04 03 Apr 2019 BST

AA
AA cut its full-year dividend to 2p per share from 5p

Roadside assistance firm AA PLC (LON:AA.) on Wednesday announced a “strategic partnership” with car insurer Admiral alongside a 62% decline in full-year pre-tax profit.  

Under a three-year contract, AA will offer roadside assistance to Admiral’s 4.3mln UK motor insurance customers.

READ: The AA posts in-line underlying profits despite decline in membership

“Partnerships are paramount to the success of this syndicated B2B (business to business) model and the growing insurance market is critical,” said AA chief executive Simon Breakwell.

Separately, AA said it retained or extended all of its key B2B contracts due for renewal in the 2019 financial year, including Lloyds Banking Group PLC (LON:LLOY), Jaguar Land Rover, Volkswagen Group and Ford.

Revenues led higher by growth in roadside assistance 

B2B contracts within the roadside assistance division were the key driver of total revenue growth of 2% to £979mln in the year ended January 31.  

Roadside assistance revenue increased 3.3% to £841mln as AA attended to more than 3.73mln breakdowns, up 1% on the previous year. Repair rates fell to 76.6% from 77.3% and the call-to-arrive time was cut to 43 minutes from 50 minutes.

However, business customers fell 1% to 9.79mln due to a decline in the number of added value accounts with banking partners and a reduction in new car registrations in the automotive sector.

In the business to consumer arm of roadside assistance, the paid membership base fell by 2% to 3.21mln and the retention rate declined 2% to just above 80%.

Revenue in the motor insurance business dropped 4.8% to £138mln, reflecting a decline in the home emergency services consumer business, which was sold in January 2018. 

Excluding the home emergency services business, revenue in the insurance division rose by 2.2% to £135mln.

Profits hit by restructuring costs and pension payments

Pre-tax profit fell to £53mln from £141mln after spending £26mln on its restructuring plan and taking a £22mln charge to equalise pension payments for men and women

The restructuring has included an overhaul of AA’s IT systems, the roll-out of new digital services, new leadership team and other new hires.

A high court ruling that meant Lloyds had to equalise pension payments had repercussions for other UK businesses and AA. 

Excluding items, adjusted pre-tax profit dropped to £115mln from £164mln.

Trading EBITDA – the company’s preferred profits measure, fell to £341mln from £391mln but was in line with its guidance of £335mln to £345mln.

AA said the weaker trading EBITDA reflected investments in the recruitment of additional patrols and call-centre staff as well as increased third-party garaging costs resulting from higher demand for its services during the year. 

Dividend lowered as cash flows hurt by debt restructuring 

The firm proposed a total dividend for the year of 2.0p, down from 5.0p a year ago.

The cash balance edged down to £116mln from £150mln due to a £34mln cash outflow mainly related to a debt refinancing in July.  

"One year into our strategic plan we have made significant progress,” said Breakwell.

“The results we are announcing today are in line with our previous trading EBITDA guidance and reflect our investment in the business which puts service, innovation and data at the heart of the AA.”

He added: “We recognise there is still a lot to do, but we are building from a position of strength as market leader in breakdown, with best in class customer service, a growing Insurance business and a clear plan to differentiate the AA through digital capabilities and investment in connected car solutions.”

Recovery expected 

Looking ahead, Breakwell said the company is confident that its strategic plan will deliver “sustainable EBITDA growth” and “strong free cash flow generation”.

The group is targeting £80mln in free cash flow to equity in 2020 and is aiming for trading EBITDA growth of 5% to 8% by 2023 compared to the level reported in 2019. 

In morning trading, shares rose 4.2% to 94.1p.

Liberum maintained a 'buy' rating and target price of 130p, saying the results were ahead of its expectations.

The broker said successful re-bid of the Lloyds Banking Group contract in February and Wednesday's Admiral win were important milestoles. 

"Following the in line results, we leave our headline EBITDA estimates unchanged," it said. 

"Fiscal year 2020 should benefit from the non-repeat of £20mln of one-off costs, including £10mln to £12mln of the significant increase in break-downs in the year. We expect sales growth of 1% in 2020 to £990mln."

 

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