It’s not every day we hear of a FTSE 250 company boss getting the sack, but that’s the shocking news that AA (LSE: AA) shareholders had to face on Tuesday afternoon.
The company said: “Bob Mackenzie has been removed by the Board from his role as Executive Chairman, from his other roles and as a Director and as an employee of the Company, for gross misconduct.“
The immediate result was a 19% fall in the share price to a day low of 199.5p, though it’s picked up a little since then and stands at 215p at the time of writing today.
The exact nature of the alleged misconduct has not been revealed, though the company later said it was a “personal conduct related matter” — which implies there’s been no financial shenanigans and that we’re unlikely to see any restatements of accounts or anything scary like that.
To add confusion today, Mr Mackenzie’s son Peter said it was all down to a serious health issue and that the executive chairman had actually resigned and has been admitted to hospital.
First-half update
Whatever details finally emerge, what counts is how it affects our evaluation of AA as an investment. And the company appended an update to the shock revelation, ahead of first-half results due on 26 September.
It appears that the first six months of the year have been “impacted by the effect of erratic work load patterns on an inherently fixed cost base.” June and July were the hardest hit, when spikes in demand could not be met by the firm’s own vehicles and had to be farmed out to a third party.
Accounting policy changes should make some differences too, and we were told we should now expect “full-year performance to be broadly in line with that of the last financial year.“
So it looks like forecasts are going to have to be scaled back — City analysts had been predicting a 12% rise in earnings per share, with a further 11% pencilled in for 2018.
But even if earnings remain at last year’s level, the share price crash means we’d still be looking at a P/E of only 10.1 — and if the dividend is unchanged, it would yield 4.3%.
Having said that, I wouldn’t be surprised to see the dividend still lifted in line with previous expectations, as it would be more than twice covered by earnings — we could yet see a yield of more than 4.5%.
Role separation
The splitting of the chairman and chief executive roles, which the company says was being planned even before Mr Mackenzie was elbowed out, has got to be a move in the right direction. I really don’t understand why any large company should be allowed to combine the roles, with the inherent potential conflict of interest it entails.
In the meantime, John Leach has become the new chairman, and Simon Breakwell has provisionally donned the chief executive hat while a search for a permanent replacement gets under way.
Looking to the longer term, I actually don’t see this week’s events as making much difference to AA’s performance and its attraction as an investment.
What I see is a cash cow, almost certain to keep churning out progressive dividends, and whose shares are on a bargain valuation now. I’d take advantage of the dip and buy.
