Interim figures from the AA contain so many variables that it is hard to discern the wood for the trees. The overall conclusion, though, is that management have much to do to move the business forward.
The AA spent about five years in the hands of private equity and not a lot of investment went into the brand or its operations. Those private equity owners loaded it with £3 billion of debt, restructured, to the group’s great advantage, in April.
This, though, left a one-off increase in financing costs of £87.4 million. These ballooned to more than £200 million in the half-year to July 31 and left a £51.1 million net loss. The AA is paying its first dividend, of 3.5p.
This, strictly speaking, is uncovered. Take out that one-off financing cost, though, and it absorbs about 60 per cent of the earnings left. The refinancing will leave interest payments of about £145 million for the full year, comfortably affordable on expected earnings of £417 million.
Fair enough. The AA is self-financing and paying a dividend, even if the yield is a scant 3 per cent. The halfway figures, though, show areas of weakness in its core operations, and trading earnings before interest tax and one-offs that well undershot expectations at £199.2 million, against £211.8 million last time.
The AA says that there were factors not in last year’s figures, such as foreign exchange and investment in marketing, which clipped the headline figure by £15 million, although to what extent these should be regarded a one-offs is arguable.
The weaknesses are a continuing loss of members, albeit at a slower rate, and its involvement in the still competitive motor insurance market. The former will require further investment in the brand and the quality of service.
The second reflects an understandable unwillingness to write premiums at unprofitable rates. The AA is to take some of its underwriting in-house and so use its data from the road services side to better use, but any recovery will be a slow one. The shares, floated at 250p last summer, have been well above £4 for no obvious reason and fell 43¾p to 289½p yesterday. They sell on 14 times’ earnings, but do not look worth chasing, given the task ahead.
Revenue £485m
Dividend 3.5p
Interest bill this financial year £144.6m
MY ADVICE Avoid for now
WHY The AA has much work ahead of it, its core markets require some remedial action and the price earnings multiple looks unattractive
Close Brothers is pretty much where it wants to be, but the levers for moving the business forward are limited. It has a growing banking operation, with niche positions in markets such as lending to small companies and in car loans and with good prospects of moving into other areas, such as financing for small retailers wanting to offer cheap loans.
The loan book in the year to July 31 was up by 8.5 per cent to £5.7 billion. The sectors that the bank is in tend to report low levels of defaults, too, and the bad debt ratio is improving.
The asset management operation boosted funds under management by 11 per cent to £10.8 billion. This still looks a little sub-scale and the margins are, as a consequence, lower than those seen elsewhere in the sector, but the business is now profitable. Plainly, market conditions will govern further progress, but clients do not seem inclined to sell out. Winterfloods, the securities operation, is heavily tied to the sale of small-cap stocks. The market was good enough during the second half, but turbulence since then inevitably will have hit volumes.
Close has a good record of dividend growth, having maintained payments through the downturn, and a 9 per cent rise for the year is about in line with underlying earnings and offers the support of a yield just below 4 per cent.
The shares, off 4p at £14.78 in yesterday’s market mayhem, sell on 12 times’ earnings. I suggested taking profits in the spring at above £16; now they go back on the “buy” list again.
PBT £219.9m
Dividends 53.5p
MY ADVICE Buy
WHY Shares have come back to level that suggests value
So often troubles come in threes. Thus there were three negatives that hit AG Barr’s halfway figures and meant that profits for the full year are not going to be any better than last time. One was the awful weather, particularly in the north, which did not encourage the purchase of soft drinks. It has not improved much since. The second is the comparison with the previous year, when Barr sponsored the Commonwealth Games in Glasgow.
The third is a root-and-branch reorganisation across the group of IT, sales and accounting, which caused disruption. Although margins held up, sales in the period to July 25 fell by about £10 million, or 6 per cent, on a directly comparable basis, taking out acquisitions and other one-offs.
The soft drinks market is suffering price deflation, as well as continuing competitive pressures. Neither is going away. The benefits of the reorganisation will come through in the next financial year, when profits will come in at about what was expected in this one. Barr shares, off 32p at 530p, traditionally have enjoyed a high multiple, but, on 19 times’ earnings, do not suggest an immediate purchase.
Revenue £130m
Dividend 3.36p
MY ADVICE Avoid for now
WHY Multiple looks high, given the slow pace of growth
And finally…
Clinigen, a specialist pharmaceuticals provider that floated on AIM in 2012, has quietly grown into a company with a market capitalisation of about £800 million. It has announced its second big deal this year, a business that supplies Asia, Africa and Australasia, for a maximum of £100 million. This follows the £225 million purchase of a British supplier in April. Clinigen’s raison d’etre is supplying drugs to places where they are not at present available, a market reckoned to be worth more than $5 billion a year.
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