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Saga - Profits and dividend rise

George Salmon | 22 September 2017 | A A A
Saga - Profits and dividend rise

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Saga plc Ordinary 1p

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Underlying profit before tax rose 5.5% to £110.2m at the half year stage. This, plus the group's positive outlook for the business, predicated an 11.1% increase in the interim dividend, to 3.0p per share. The shares rose slightly on the news.

Also in these results, Saga announced the launch of its new Saga Possibilities membership scheme, and that a new cruise ship, Spirit of Adventure, has been commissioned. Delivery is expected in August 2020.

Our view

Saga is an unusual animal - what other company would tie up cruise ships and motor insurance?

Uniting the group's eclectic product offering is a relentless focus on its over 50s customer base. Many in that age bracket are asset rich with comfortable pensions in place, and, due to demographic change, the category is swelling in number.

Saga's brand awareness and loyalty is strong, meaning it is well-placed to capitalise on this 'grey emerging market'. Nonetheless, there remains work to do before the group can sit back in cruise control.

At present, Saga has two significant divisions - Insurance and Travel. Of these, Travel (cruise ships and tour operating) may be the more high profile, but Insurance, particularly Motor, is the money spinner. It could be that buying from the same people who provide your holiday results in a warm fuzzy feeling not normally associated with car insurance.

Recent initiatives, such as a quota agreement with MunichRe and the motor insurance panel, have shifted underwriting risk on to third party insurers and increased broking activities. This has freed up capital and improved earnings quality in the insurance business. Next on the to-do list is increasing the number and value of Saga products each customer buys.

Its new membership scheme is its chief weapon here. This will target almost 500,000 High-affinity Customers (HACs) that buy premium products and hold an average of 2.3 core Saga products each. The goal is to acquire and retain more of these high value customers while also improving cross-selling opportunities.

In the long run, Saga is looking to expand its range of services even further. Of these new services SagaMoney is the most advanced, offering investment services and financial advice. Other pilot projects include Home Care and Retirement Villages.

All this means that the Saga of tomorrow could look markedly different from the insurance-focused business of today. For now, it's the insurance business providing the cash flows to support the dividend. The shares currently offer a prospective yield of 5.2%.

Interim results

Revenue in the Retail insurance broking business fell 4.4% to £144.9m, partly due to the closure of the Direct Choice brand and selling fewer Home policies. However, improved profit per policy in the challenging Home Insurance market, lower costs in the Motor division and a higher contribution from Other Insurance broking ensured pre-tax profit rose 4.7% to £70.9m.

Saga's in-house underwriter AICL delivered an improved combined operating ratio of 97.1% (H1 2016: 98.8%). However, Lower investment returns, the impact of the quota sharing deal and a £2.2m reduction in reserve releases led pre-tax profits down 4.7% to £46.8m.

The Travel division generated pre-tax profits of £11.9m, 63% more than the prior year. Fewer days lost to ship maintenance led to a 21.5% increase in passenger days, with a higher spend per tour passenger also boosting profits.

The loss from Emerging Businesses and Central Costs remained unchanged at £19.4m

Available operating cash flow of £89.6m helped net debt fall to £460.4m. This helped the ratio of net debt to EBITDA fall from 2.2x to 1.8x, within group's medium term target range of 1.5x to 2.0x.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.