February 21, 2018 / 9:05 AM / 6 months ago

UPDATE 2-Britain's AA shares crash after dividend cut, profit forecast

* Total dividend 5p full-year Jan 2018, future dividends 2p

* Full-year Jan 2019 core profit seen at 335-345 mln stg

* Expects core profit 390-395 mln for Jan 2018 full-year

* 10 hedge funds had large “shorts” at Feb 19 - FCA data (Adds hedge fund short positions, further CEO comment, updates shares)

By Carolyn Cohn

LONDON, Feb 21 (Reuters) - AA shares fell by 22 percent on Wednesday after the British roadside recovery group and insurer said it planned to pay lower dividends and forecast lower core profit.

In a strategy update following a profit warning and the sudden departure of its executive chairman last year, AA said it would pay a total dividend of 5 pence per share for the 2018 financial year, but that this would then fall.

AA shares were on course for their largest one-day drop following the revised outlook and dividend news, benefiting some hedge funds who have targeted AA with “short” positions.

Meanwhile, bankers have told Reuters that the AA has attracted possible private equity takeover interest.

Chief financial officer Martin Clarke said the AA, whose distinctive yellow livery has been a feature of Britain’s roads for more than a century, was prioritising investment and that its debt structure prevented it from paying higher dividends.

“We are committing to paying two pence per year in subsequent years until such time as free cash flow and profitability gets us to a position where the board can justify higher dividends,” Clarke told Reuters by telephone.

The dividend cut marks a change for AA, which paid a total dividend of 9.3 pence in the 2017 financial year and had attracted dividend-focused investors such as Neil Woodford’s Woodford Investment Management, a major AA shareholder.

“Neil has been very supportive of investing in the business for long-term shareholder growth,” AA Chief Executive Simon Breakwell told Reuters by phone.

Woodford Investment Management and hedge fund Parvus, which Breakwell said was the AA’s largest investor, both declined to comment.

AA BREAKDOWN

AA forecast trading for the 2019 financial year of between 335 and 345 million pounds ($469-$483 million), below this year’s forecast of 390-395 million pounds..

The AA, formed in 1905 by a group of motoring enthusiasts in London, issues preliminary results for the 2018 year in April.

The first AA patrols indicated dangers on the road and helped motorists who had broken down. The AA has a more than 40 percent share of the roadside assistance market, which it says is worth around 2 billion pounds a year.

Breakwell said plans to boost investment in digital insurance products and customer service contributed to the lower 2019 profit forecast.

AA shares, which were floated in 2014 by private equity backers Charterhouse, CVC and Permira, hit record lows and were trading at 90.07 pence per share at 1008 GMT.

“Risk reward is too negatively skewed on ‘show me later’ profits,” Jefferies analysts, who rate AA “underperform”, said.

Although two bankers told Reuters that private equity investors were again interested in bidding for the firm, Breakwell said AA had received no approaches.

Ten hedge funds had outstanding shorts of more than 0.5 percent of AA stock, Financial Conduct Authority (FCA) filings from Feb. 19 showed, giving them potentially bumper returns.

In a short trade, a fund borrows the stock to sell on, hoping to buy it back later at a cheaper price before returning it to its original holder. ($1 = 0.7146 pounds) (Additional reporting by Maiya Keidan, Dasha Afanasieva and Ben Martin, editing by Alexander Smith)

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