Market report: Broker’s caution puts AA into reverse

The house broker to the AA pulled the handbrake on its client’s shares today, which had investors wondering whether the breakdown firm’s imminent update would contain a note of caution about trading.

Analysts at Liberum, the FTSE 250 firm’s joint broker alongside Morgan Stanley and Cenkos, cut its profit forecasts for 2018 by 6% and its target price from 375p to 340p as it predicted that the AA’s recovery over the next couple of years would not be as pronounced as expected.

The broker said increased use of the roadside assistance service validates the business model but means higher operating costs as it trimmed its underlying profit forecasts for the division for next year by £10 million.

The insurance arm does not fare much better. The joint venture with the Bank of Ireland “increases revenues but not profits, as the products take 2-3 years to pay back”, Liberum said.

Shares in the AA, which is expected to issue a trading update at the start of February when its financial year ends, reversed 14.14p or 5.2% to 256.76p.

The market was in “risk-off” mode as buyers sat on the sidelines ahead of Donald Trump’s inauguration, with the FTSE 100 down 8.23 points to 7200.21.

Royal Mail, 11.9p cheaper at 410.6p, was on the back foot again as analysts slashed their target prices after yesterday’s sharp decline in letter volumes.

AstraZeneca was off-colour, down 64.5p at 4404p after rival cancer drug firm Bristol-Myers Squibb decided not to seek fast-track approval in the US for its lung cancer combination therapy, similar to the one being developed by Astra.

GKN, down 3p to 339p, and Meggitt, off 4.6p at 437.4p, lost altitude as Liberum downgraded the aerospace engineers to Sell amid tough industry conditions.

Upbeat trading from over-50s womenswear retailer Bonmarché lifted the shares 5p to 84p, while on AIM, MySale, the online fashion company backed by Sir Philip Green and Mike Ashley which operates mainly in Australia and South-east Asia, said underlying earnings doubled to A$3 million (£1.8 million) in the first half. Its shares were up 3p at 128.5p.