Wednesday newspaper share tips: AA, Bowleven

AA is a steady business at the core, but its previous private equity owners left it under a pile of debt – so it remains a high-risk option – The Daily Telegraph’s Questor said.

The roadside recovery group can rely into a steady stream of annuity-like revenue streams from motorists who pay an annual subscription fee.

Unfortunately, private-equity outfits CVC and Permira sought tapped into those same streams and then loaded the company with debt to finance an ill-fated merger with Saga, in the form of Acromas.

So while most of the business’s moving parts seem to be functioning well, its £2.8bn debt pile ate up almost all of the 305m of earnings before tax and interest rate charges the firm made in the year to the end of January.

The company does have a strong brand and market position.

Furthermore, it has repaid some of its most expensive debt, which should see interest charges fall by more than £45m this year.

Some big institutional investors have also backed the restructuring.

However, “the gap between the basic earnings per share or 1p and the adjusted earnings per share of 23p gives too much room for judgement,” so avoid, Questor said.

There may be more rough seas ahead for AIM-listed oil explorer Bowleven, Questor said.

Stock in the Cameroon and Kenya-focused company dropped 10.0% over the past week after the outfit was forced to slash the value of its oilfields.

That was the result of its decision to downgrade its long-term forecast for the oil price to $65 per barrel, which meant the net book value of its assets plunged from $493m at the end of 2014 to $205m at the end of 2015.

Nevertheless, even that reduced outlook might still prove over-optimistic, the tipster said.

Fortunately, a well-timed sale of interests off-shore Cameroon in June 2014 left the company with $100m of cash on hand.

That is enough to survive but cash levels dropped from $145m at the end of June 2015 to $107m by the end of December.

Furthermore, progress on oil and gas projects is being delayed by the low price environment.

True, the shares net asset value comes in at 80p, versus the then current share price of 20p.

"However, this is an extremely high risk situation and depends to a large extent on a sustained recovery in the oil price," Questor said.

Investors would therefore be best advised to sell and cut any losses, Questor concluded.