AA PLC – Platinum Equity rescinded the takeover offer

AA PLC (LON: AA.) is an FTSE All-Share listed auto services company which operates in the roadside assistance and insurance businesses. It provides roadside assistance market along with training within their Driving Services division.

On 29 September 2020, the Company expects to release the interim results for the six months ended 31 July 2020.

Investment Rationale: Speculative Buy at GBX 27.70

• The key trading multiples (EV/EBITDA, Price/Cash Flow and Price/Earnings) multiples are currently undervalued compared to corresponding multiples of the Consumer Non-Cyclical industry.
• From the technical standpoint, 14-Day RSI (29.23) and 100-Day SMA (GBX 28.12) is supporting the upside potential.
• Over the past five years, Gross Margin and EBITDA margin have remained above 60% and 34%, respectively.
• Over the four years (FY16 – FY20), the Company’s net income surged from £6 million in FY16 to £87 million in FY20. Compounded annual growth rate (CAGR) stood ~95.14%.
• In the past three months, AA’s stock has yielded a positive return of ~11.42% while FTSE All-Share gave a negative return of ~7.11%, reflecting the outperformance against the benchmark index.

Risk Assessments

• The business performance is exposed to higher than unanticipated claims costs, cyber-security breaches, and volatile macro-economic factors.
• Covid-19 pandemic and associated restrictions are likely to impact the demand in the short-term.
• Further, a changing regulatory environment and stiff competition may adversely affect the activities.

Recent News

23 September 2020: Platinum Equity affirmed that the discussion with AA PLC’s board has been terminated and hence, it does not intend to make any offer.

Financial Highlights – FY20 (as on 18 May 2020)

(Source: Company Website)

• In FY20 (for the year ended 31 January 2020), the Company delivered a robust operational and financial performance, but in April 2020, the business was impacted due to Covid-19 pandemic.
• As of 31 January 2020, cash and cash equivalents stood at £159 million along with £50 million of the working capital facility.
• In FY20, Capex of £69 million was significantly lower than £82 million in FY19. Similarly, fee cash flow remarkably surged to £83 million (FY19: £12 million).

One Year Share Price Chart

 1-Year Chart as of 23 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

In FY21, the Company expects to deliver a robust performance despite challenging trading conditions, though it might be slightly below the level seen in FY20. The positive predictable cash generation and resilient trading EBITDA performance coupled with the gradual return of business activities following the lockdown easing, underpins the financial flexibility even in the short-term. In B2B business, AA PLC is on-track with robust renewal rates and new contracts acquired. The Company is focussing on long-term partnerships by utilising the operational scale, innovative approach to customer solutions, and service excellence in B2B business.

Based on the factors discussed above, we have given a “Speculative Buy” recommendation on AA PLC at the current market price of GBX 27.70 (as on 23 September 2020, before the market close at 2.24 PM GMT+1) with lower double-digit upside potential based 3.40x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Hostelworld Group PLC – Strengthened the liquidity with debt and equity issuance.

Hostelworld Group PLC (LON: HSW) is an FTSE All-Share listed company which is engaged in online hostel-focused booking platform internationally. It was founded in 1999, and presently, it connects with 17,700 hostel properties in over 179 countries.

Investment Rationale – Speculative Buy at GBX 50.20

• The key trading multiples (EV/Sales and Price/Earnings) multiples are currently undervalued compared to corresponding multiples of the Technology industry.
• From a technical standpoint, 14-Day RSI (22.80) is supporting the upside potential.
• HSW’s Debt/Equity has stayed below 0.07x over the past three years, which is lower than the industry median of 0.13x.
• It intends to broaden the catalogue of experiences and social features beyond hostel accommodation, to emerge from the COVID-19 crisis stronger than before.

Risk Assessments

• Covid-19 pandemic and associated restrictions will continue to impact the demand in the short-term.
• It is also exposed to the foreign currency risk since their primary operating currency is Euro and strengthening of the US dollar can cause a financial risk.
• The performance is also exposed to negative economic growth, rising unemployment rates, weakening currencies, and higher taxes or tariffs.

Recent News

17 September 2020: The Company passed a resolution to approve the Bond Issue and authorised the directors to capitalise a sum of €16,362.52.

Trading Update for H1 FY20 ended 30 June 2020 (released on 12 August 2020)

 (Source: Company Website)

• In H1 FY20, net revenue declined by 69% year-on-year due to COVID-19 led travel restrictions from late Q1 FY20.
• The net bookings declined 67% year-on-year and net booking volume decreased from 3.5 million in H1 FY19 to 1.1 million in H1 FY20, with cancellations €5.4 million.
• In June 2020, the Company raised €15.2 million in gross proceeds through a non-pre-emptive placing.
• As of 30 June 2020, the liquidity position was stronger with closing cash position of €32.9 million (H1 FY19 €25.4 million), including a short-term financing facility of €3.5 million.

One Year Share Price Chart

1-Year Chart as of 23 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

Inevitably, the short-term outlook for the travel industry remains extremely challenging. However, the board is confident that HSW would emerge from the COVID-19 crisis stronger than before as the Company has entered FY20 with a strong balance sheet position, and it has responded swiftly to navigate through this crisis. The initial focus was on cash preservation; however, in June, it has strengthened the balance sheet through debt facility and an equity raise.

Based on the factors discussed above, we have given a “Speculative Buy” recommendation on Hostelworld Group PLC at the current market price of GBX 50.20 (as on 23 September 2020, before the market close at 8.54 AM GMT+1) with lower double-digit upside potential based 2.70x EV/NTM Sales (approx.) on FY20E Sales (approx.).  

*All forecasted figures and Peer/Industry Information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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