AA PLC – UK’s Leading Provider, with Excellent, Swift, Decisive and Definitive Response to COVID

AA PLC (LON: AA.) is an auto services company which operates in the roadside assistance and insurance businesses.

Financial Highlights (for the year ended 31 January 2020) – Reflecting Strong Delivery Across all Metrics

(Source: Full Year Results, Company Website)

For the financial year 2020, the revenue increased by 2% to £995 million as compared with the previous year (2019: £979 million), reflecting solid performance across both Roadside and Insurance. Trading EBITDA increased by 3% to £350 million in FY20, in line with market expectations. Operating profit was 17% higher mainly due to gain from the early settlement of deferred consideration related to AA Cars acquisition and lower adjusting operating items. PBT (profit before tax) and PAT (profit after tax) were ahead of last year; adjusted EPS (earnings per share) decreased by 5% to 14.1 pence, due to lower adjusting operating items. Strong free cash flow generation of £83 million in line with guidance. In FY20, the capex of £69 million in line with guidance. On 31^st January 2020, the cash and cash equivalents were £159 million and an available working capital facility of £50 million.

Share Price Performance
 
Daily Chart as at May-07-20, before the market closed (Source: Refinitiv, Thomson Reuters)

AA PLC’s shares were trading at GBX 29.60 before the market close (at 10:52 AM GMT+1) on 7th May 2020 and were up by 12.33% versus the previous day closing price. Stock 52 weeks High and Low are GBX 77.05/GBX 13.32.

Valuation Methodology

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

Growth Catalysts
FY20 delivered strong performance across all metrics– Trading EBITDA, Cash, Roadside and Insurance. Paid membership was up by 0.2%, reflecting a return to growth during the second half of the year. The company has continued strong growth in motor book, which was supported by profitable growth of the in-house insurer and insurer Hosted Pricing (IHP). 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.

Conclusion
During the financial year 2020, the company has shown improvement across all metrics.In Roadside business, the revenue remained flat with the acquisition of AA Prestige offset by lower B2B revenues as well as the benefit of higher B2C income. The group 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. 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. Proactive measures in place to minimise the impact of COVID-19 and as a result, the company expect current year performance to be slightly below FY20. The business is demonstrating resilience around Trading EBITDA and Cash generation.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Speculative Buy” recommendation at the closing price of GBX 26.35 (as on 6^th May 2020) with lower double-digit upside potential based on 2.82x NTM EV/Sales (approx.) on FY21E sales (approx.).

Tungsten Corp PLC – Reflecting Strong Value Proposition

Tungsten Corp Plc (LON: TUNG) is a London, United Kingdom-headquartered, leading global supply chain enabler which founded the Tungsten Network’s electronic invoicing network in 2000 to help in accelerating global trade for customers.

Recent News
On 17^th April 2020, the company announced the appointment of Chris Allen, as a Chief Financial Officer.

Trading update (for the nine months ended 31^st January 2020) – Reflecting Robust Growth Across all Metrics

(Source: Trading Update, Company Website)

During May 2019 to January 2020 (YTD Q3-FY20), the revenue surged by 3% to £27.1 millionas compared with the corresponding period of the last year (£26.4 million). The adjusted EBITDA increased by 56% to £2.8 million in YTD Q3-FY20 from £1.8 million in YTD Q3-FY19. At the same period, the adjusted EBITDA margin rose to 10%. Net cash stood at £1.0 million and remained the same against the half-year reported. YTD Q3-FY20 new sales billings (NSB) decreased to £2.9 million as compared to £3.4 million in YTD Q3-FY19. 

Share Price Performance

Daily Chart as at May-07-20, before the market closed (Source: Refinitiv, Thomson Reuters)

Tungsten Corp PLC’s shares were trading at GBX 35.1513 before the market close (at 11:17 AM GMT+1) on 7th May 2020 and were up by 3.69% versus the previous day closing price. Stock 52 weeks High and Low are GBX 55.00/GBX 19.00.

Valuation Methodology


*Peers: Boku Inc, Equals Group Plc, Sandpiper Digital Payments Plc, Universe Group Plc, and Eagle Eye Solutions Group Plc.

Valuation Metrics


(Source: LSE)

As on 31st March 2020, the Price to Sales multiple of the TUNG was 0.9x, and the same multiple was lower as compared with the Financial Services industry. It is reflecting that the company is trading at a lower multiple as compared to its peers.

Conclusion
The company has shown an increase in financial performance in the nine months ended 31^st January 2020.Due to ongoing uncertainty in the UK economy created by COVID-19, the financial services sector is negatively impacted. Failure to win or retain customers could affect the revenue and profitability of the company. Inability to finance its business could hamper its operations. Through revenue growth and continued cost discipline, it plans to achieve growth in the EBITDA margin. The company delivered a strong position, with net cash of approximately £2.2 million at 10 March 2020, and £4 million committed Revolving Credit Facility. The company expects to become the invoice delivery platform of choice for current and new suppliers on its global network through the launch of its Total AR solution.

Over the course of three years (FY16 - FY19), the company’s revenue surged from £26.08 million in FY16 to £36.04 million in FY19, giving an annual growth rate of approximately 11.38 per cent on CAGR basis.
Based on the decent growth prospects and the valuation done using the above method, we have given a “Speculative Buy” recommendation at the closing price of GBX 33.90 (as on 6^th May 2020) with lower double-digit upside potential based on 1.27x NTM EV/Sales (approx.) on FY21E sales (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*The “Speculative Buy” recommendation is also valid for the current price as covered in the report as on 7^th May 2020.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.