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Saga - full year guidance unchanged

Nicholas Hyett | 28 January 2020 | A A A
Saga - full year guidance unchanged

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Saga expects to meet its target of underlying pre-tax profit of between £105m and £120m at the full year, despite challenging conditions.

New CEO Euan Sutherland said Saga would focus on improving cost efficiencies, improving the group's financial position and reducing debt.

The shares rose 6% following the announcement.

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Our view

Saga might be best known for its 50+ holidays, but it's actually insurance that accounts for virtually all of the group's profits. Insurance is a tough market to be in though, and the shares have more than halved in value in the last year.

Increased price transparency and ease of switching has made general insurance an increasingly difficult sector to stand out in. Going forwards Saga plans to focus on its direct to consumer business, investing in the brand and encouraging customers to come direct for insurance.

That's easier said than done though.

We've worried for some time that Saga's brand doesn't have the same resonance with the younger end of its 'over 50s' customer base. That would be a real problem, because without brand loyalty Saga is just another insurer. There's little reason to pay a premium for a generic product, and there's very little stopping competitors copying successful innovations.

While these problems haven't gone away, it looks like the big drop-offs in profit may be behind us. We don't want to be too hasty but, after September's interim results and the most recent update, the insurance business seems to have stabilised. Investors may even be hoping for a return to growth, though it's not clear how that will be achieved.

We're yet to hear a huge amount from new CEO Euan Sutherland, but so far he's talked about cost savings and debt reduction. That's a short term measure, and we look forward to hearing about his long term vision for the group.

Non-insurance products like cruises are actually performing relatively well too - securing niche positions in their respective markets and with healthy levels of demand. Unfortunately it's still a side show - if insurance continues to struggle, the cruise ships alone won't make for smooth sailing.

It's encouraging to see the group making strides to improve performance, but only time will tell if attempts to revamp its insurance offering are enough to attract premium customers back. The company currently trades on a PE ratio of just 5.3 times, some way below the longer term average. After the recent dividend cut the group trades on a prospective 10% yield.

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Full year trading update

In the group's Insurance Broking division, full year Saga branded home and motor policies will be approximately 3% lower than last year. That reflects a highly competitive market, as well as a disciplined approach to new business. The lower new business strain means margins are expected to be at the higher end of the £71-£74 range. Customer retentions and direct business were up, and over 60% of direct new customers chose the new 3-year fixed price policies.

Underwriting reserves are in line with expectations, but higher inflation on third party damage and theft costs, means overall claims inflation is running at around 7%, ahead of long term expectations of around 5%. Management says this will not significantly impact the current year, but may impact future margins if conditions do not improve.

In Cruise, the group's new ship, Spirit of Discovery, is expected to generate cash profits (EBITDA) of more than £20m in the second half. Forward bookings for 2020/21 have reached 76% of full year target levels, and the group still expects to achieve £40m of cash profits per new ship.

Tour Operations revenue will be down around 5% compared to last year, although escorted tours are proving more resilient. The administration of Thomas Cook has resulted in about £4m of exceptional costs.

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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 for more information.