AA surges as Barclays initiates coverage at 'overweight'

Barclays said that three years into its investment programme, the full-year 2017 results were the first sign that it is starting to bear fruit.

The bank said there have been a number of changes at the company: the renewals and sales process is modernised and more flexible; brand marketing has re-started; the new underwriting business can utilise propriety vehicle data and is performing ahead of management expectations and a new CRM should kick-start cross-selling efforts.

It pointed out that the drop in personal roadside membership and motor insurance policies - which disappointed post IPO - has been halted and argued that the new underwriting arm could reverse fortunes in the insurance business.

"This potential inflection point coincides with the shares trading at near all-time lows. As investment/capex spend normalises, we expect free cash flow generation to increase dramatically in FY19e (CY18e).

"This would place the shares on a CY18e free cash flow yield of circa 11%. We argue that this is not reflective of the core roadside businesses, which is defensive, has good visibility and can generate substantial cash flow."

Barclays said that after several years of relatively flat performance in the core business and a drop in the number of insurance policies, the AA is now positioned to return to modest growth. It expects around 3% organic growth a year and 4% EBITDA growth over FY18-22.

At 0900 BST, the shares were up 6% to 247.20p.