AA’s Push Toward Millennials Leads to Stock Breakdown

Updated on
  • Breakdown firm cuts payout to fund investment in technology
  • Stock drops as much as 30 percent, most since AA’s 2014 IPO
Traffic travels along the A13 dual carriageway as the City of London financial district stands on the skyline beyond in London, U.K., on Monday, April 10, 2017. Photographer: Chris Ratcliffe/Bloomberg

The U.K.’s best-known provider of car-breakdown cover is itself becoming a little accident-prone.

AA Plc shares plunged the most on record on Wednesday after the 113-year-old roadside recovery and insurance firm said plans to generate growth among younger drivers would come at the expense of profit and dividend payouts.

The company, which fired executive chairman and director Bob Mackenzie in August, will boost investment in smart technology aimed at predicting breakdowns before they occur and target millennials through a sharpened focus on mobile applications, its new chief executive officer Simon Breakwell said in a statement.

The AA lost as much as 30 percent of its market value after announcing plans to slash its dividend for this year and next. The company also forecast earnings of 335 million pounds ($467 million) to 345 million pounds in 2019, which is about 12 percent below the market consensus, according to analysts at Morgan Stanley.

“The biggest problem we have is that we have not grown as quickly as we should have, for a number of years,” Breakwell said in an interview after the update. The AA’s closest competitors also haven’t been spared, he said, adding that the premium end of the market has struggled to keep up with changing trends among the younger demographic.

While “young people want everything to be done through their phones,” the need for AA’s services hasn’t faltered, he said. “People still break down at the side of the road, and that counts for young people as well.”

The new strategy should deliver significant incremental revenue and earnings in the medium-term, Cenkos analyst Sandy Chen said in a note. The stock is “worth the near-term investment, in our view,” he added.

The AA removed Mackenzie with immediate effect for “gross misconduct” in August, with the shares falling more than 60 percent in the aftermath. Breakwell was given the job on a permanent basis in September. The company held talks last summer with Hastings Group Holdings Plc over a possible combination of the companies’ insurance businesses, though the sides ultimately failed to reach a deal.

The stock was down 23 percent at 89.4 pence as of 10:27 a.m. in London.

— With assistance by John Viljoen

(Updates with comments from analysts, CEO throughout.)
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