AA PLC - Strong Performance in Insurance Business, with a Double-Digit Increase in Total Motor and Home Policies.

AA PLC (LON: AA) is a FTSE All-Share listed auto services company, which operates in the roadside assistance and insurance businesses.

Financial Highlight (FY2020)

(Source: Annual Report, Company Website)

On 18th May 2020, the Group published its annual report for the year ended 31 January 2020, with a robust financial and operational performance. The revenue for the financial year 2020 surged by 2 per cent to GBP 995 million against the prior year (2019: GBP 979 million), reflecting robust performance across both Roadside and Insurance. Trading EBITDA was up by 3 per cent to GBP 350 million in FY20, in line with market anticipations. The free cash flow stood at GBP 83 million in FY 2020, which was in line with the guidance. The net debt reduced to GBP 2.6 billion in FY2020.

Share Price Performance

1-Year Chart as at June-12-2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 12^th June 2020, before the market close (at 8:35 AM GMT+1), AA PLC’s shares were trading at GBX 24.35 and were down by 2.01 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 74.00/GBX 13.32.

From the technical standpoint, its shares were trading well above its short-term support level of 50-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

*Peers: Aggreko Plc, Ashtead Group Plc, RWS Holdings Plc, and HomeServe Plc.

Valuation Metrics

(Source: LSE)

As on 29^th May 2020, the EV to EBITDA multiple of the AA PLC was 8.0x and the same multiple was lower as compared with the General Retailers industry. It is reflecting that the company is trading at a lower multiple as compared to its peers.

Growth Catalysts
FY20 delivered strong performance across all financial and operational metrics– Trading EBITDA, Cash, Roadside and Insurance. Paid membership increased by 0.2%, reflecting a return to growth during the second half of the year. The Group has continued robust growth in the motor book.

Conclusion
In the short run, the business operations can be impacted by Covid-19, due to ongoing curfew and lockdown state. However, coronavirus has not impacted the group materially, and the Company has been maintaining solid liquidity to manage any unforeseen financial shock. The revenue from Roadside business stayed flat with the acquisition of AA Prestige. The Company is focussing on long-term partnerships by utilising the operational scale, innovative approach to customer solutions, and service excellence in B2B business. Furthermore, the company is delivering robust rates of profitable policy growth in the Insurance business. As a result, the company anticipates existing year performance to be marginally below FY20, due to COVID-19 pandemic. However, the Group has executed the strategic and operational plans well and have delivered a strong set of results in 2020, with improvement across all metrics.
Over the four years (FY16 – FY20), the company’s revenue surged from £973 million in FY16 to £995 million in FY20. Compounded annual growth rate (CAGR) stood at 0.56 per cent.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Speculative Buy” recommendation at the current price of GBX 23.25 (as on 12^th June 2020, before the market close at 8:10 AM GMT+1) with lower double-digit upside potential based on 2.90x NTM EV/Sales (approx.) on FY21E sales (approx.).

N Brown Group PLC – Operating with Improved Trading and Financing facility

FTSE All-Share listed N Brown Group PLC (LON: BWNG) is the United Kingdom-based online retailing Company, which primarily caters the range of products for footwear, clothing, and homewares.

In mid to end June 2020, the Group will release its full-year 2020 (ended 29th February 2020).

Trading and Financial Update (as on 19th May 2020)
On 19^th May 2020, the Company provided an update on trading and modifications to its debt financing arrangements, with a surge in Home & Gift categories by 74 per cent in the past 6 weeks. Whilst the business for apparel sales tumbled 48 per cent. The Group witnessed a greater hit from offline sales (compared with online sales). With consistent cash stream of inflow and revenue, BWNG’s financial service division continued to perform resiliently. During the ongoing uncertainties, the Company has adopted effective steps to preserve cash. Under the Government's Coronavirus Large Business Interruption Loan Scheme (CLBILS), the Group secured a 3-year term loan facility for GBP 50 million.

Share Price Performance

1-Year Chart as at June-12-2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 12^th June 2020, before the market close (at 8:40 AM GMT+1), N Brown Group PLC’s were trading at GBX 35.00 and were down by 5.79 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 163.90/GBX 10.02.

From the technical standpoint, its shares were trading well above its short-term support level of 20-day and 50-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

 
Valuation Metrics

Source: LSE)

As on 29^th May 2020, the EV to EBITDA multiple of the BWNG was 2.2x and the same multiple was lower as compared with the General Retailers industry. It is reflecting that the company is trading at a lower multiple as compared to its peers.

Growth Trajectory Holds Upside Potential
The Company plans to build on its strengths and looks to revitalise its mobile business and give customers a smooth experience. The Company’s online business and financial service division have been operating resiliently.

Conclusion
In the past six weeks, the Company has shown an improvement in trading activity. In financial services, the collections were broadly in line with expectation. The Group has taken effective actions to preserve liquidity throughout the FY21. BWNG witnessed a good liquidity position, with GBP 512.0 million of a revolving credit facility and GBP 45.3 million of cash as at 18^th May 2020. Considering the evolving uncertainties, the management of the Group is not able to provide full-year guidance for FY21. In the long-term, the Company prospects appear to be bright with their unique portfolio of products and brands served through flexible payment options. The Group is also making good progress with its ongoing strategic review, which would benefit in the cost reduction and thus, improve the business further.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Speculative Buy” recommendation at the current price of GBX 33.05 (as on 12^th June 2020, before the market close at 8:10 AM GMT+1) with lower double-digit upside potential based on 0.7x NTM EV/Sales (approx.) on FY21E sales (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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