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Saga - Strong trading in the second half

Equity research team | 11 January 2017 | A A A
Saga - Strong trading in the second half

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Strong trading in the second half

In a brief trading update, Saga said that trading remains strong in the second half, with robust performances from the core insurance and travel divisions.

The group has also announced a Capital Markets day on the 29th March, where it will be sharing details on the work it has been doing to analyse its customer database and map customer activities and behaviours, identifying key drivers of future value for the business.

The group is one course to meet market expectation for the full year. The shares were broadly flat in morning trading.

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. That age bracket is affluent, growing and accounts for around 35% of the UK population. Saga's brand awareness and loyalty within that group is strong and its 11.3m strong database accounts for around 50% of the entire cohort. Saga's strategy is a simple one, find out what its customers want, develop it and cross sell it.

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

Investor attention is currently focussed on two major initiatives in the Insurance division. The introduction of a motor insurance panel and a reinsurance agreement with Munich Re. The net effect of these two initiatives is to shift underwriting risk elsewhere and increase broking activities, freeing up capital and improving earnings quality.

In the long run, Saga is looking to expand its range of services still further, which is where the current recent database analysis come in. Of the current raft of new services, SagaMoney is the most advanced, offering investment services and financial advice, but other pilot projects include Home Care and Retirement Villages. Given Saga's success in cross selling, these products could grow rapidly if they prove popular.

Saga's tomorrow could look markedly different from the insurance-focused business of today. For the time being, insurance initiatives support a prospective dividend yield of approximately 4.9%, while simultaneously reducing group debt. However, as time goes on the stage is set for Saga to turn its eyes to the next great adventure.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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 for more information.