More Pain For Woodford After AA Profit Warning

Neil Woodford-backed breakdown specialist is embarking on an ambitious turnaround, after profits slumped and the dividend was slashed

David Brenchley 21 February, 2018 | 3:39PM
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car breakdown motor more pain for woodford after aa profit warning

It has been three weeks since we last wrote about a Neil Woodford holding seeing its share price decline by double-digits in one morning, so it’s about time we had another. Then, it was Capita (CPI) under the microscope; this time, it’s AA (AA.).

The iconic yellow-liveried breakdown specialist warned that profits for the year to 31 January 2019 would be between £335 million and £345 million, compared with analyst expectations of £390 million. It also slashed its dividend by more than three quarters to 2p.

Investors were not impressed, and shares were down 21% to 92p at 1pm on Wednesday, having fallen as much as 30% in early trading. The stock now trades around two-thirds below its 250p IPO price in June 2014; and 79% lower than the March 2015 high 434p.

AA will embark on an ambitious self-help programme as chief executive since September Simon Breakwell bids to turn the firm around. It said it will spend an extra £45 million of both operating and capital expenditure this year on growing both its Roadside and Insurance businesses.

This includes targeting newer, younger customers, creating new jobs and growing its ‘connected car’ product, which it says will be able to predict when customers’ cars might break down.

“These investments, while reducing our short-term profitability, are vital to our long-term success,” says Breakwell. He adds that the investments will improve both its customer offering and deliver long-term shareholder value.

But that short-term pain will hurt current investors, especially those who bought in at or near its flotation almost four years ago now. The lower dividend policy will be in place “until such time as the board is satisfied that the profit and free cash flow enable a change in policy”.

Which Fund Managers Will Feel the Pain?

Some hedge funds will be celebrating, as AA is one of the most-shorted stocks in London currently, with around 10% of its shares out on loan. AQR Capital Management and BlackRock will be the biggest winners.

However, there are plenty of losers in this equation. Los Angeles-based Capital Group Companies and Woodford Investment Management are the largest investors, owning around 14% of the company. Hedge fund Parvus has a 10% stake.

As well as both the Woodford Income Focus and the Morningstar Silver Rated Woodford Equity Income funds, the St James’s Place UK High Income Fund, also run by Woodford, is invested.

Elsewhere, the Bronze Rated Liontrust Special Situation Fund, run by Anthony Cross and Julian Fosh, also has a sizeable shareholding in the firm, with 1.365% of the portfolio weighted to it.

Other investors include GVQ UK Focus, River & Mercantile UK Equity Smaller Companies and the Silver Rated Henderson Smaller Companies Trust (HSL).

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk