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Saga - coronavirus hits Travel, Insurance unaffected

Sophie Lund-Yates, Equity Analyst | 5 March 2020 | A A A
Saga - coronavirus hits Travel, Insurance unaffected

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Saga plc Ordinary 1p

Sell: 19.79 | Buy: 20.12 | Change -1.24 (-5.64%)
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Saga announced its Travel business has been impacted by the coronavirus outbreak. Full year earnings will be affected, but management is unable to predict the eventual impact with any certainty. Performance in the Insurance business has been "robust".

The group has also sold two small fringe assets, Patricia Whites and County Cousins, for an enterprise value of £14m.

The shares fell 8.6% 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 this 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.

While they only account for a small portion of group profits, non-insurance products like cruises had actually been performing relatively well recently. They'd been securing niche positions in their respective markets and seeing healthy levels of demand. Unfortunately, the coronavirus outbreak has slowed bookings and increased cancellations. Assuming the outbreak proves temporary, we think the division should recover in time.

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 3.0 times, significantly below the longer term average of 11.3, and reflects the challenges ahead.

After the recent dividend cut the group trades on a prospective 13.9% yield. Investors should keep in mind that given the challenges, we wouldn't be surprised by further dividend cuts going forward.

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Trading update

Until recently Cruise bookings had been "very strong", and 80% of the full year revenue target had been secured as of 29 February 2019. While cancellations have increased, the most recent departures have still been around 80% full.

The Tour Operations division has also experienced a rise in cancellations, and forward bookings for 2020/21 are down around 20%. However, management says it will be able to react and flex parts of the cost base to compensate, due to its lower exposure to Northern Europe and the Far East.

The Insurance division is not currently expected to be materially impacted by the outbreak.

As at 31 January 2020, Saga's net short term bank debt stood at £110m, down from £148m at the end of July 2019. Further disposals are intended to reduce this by another £37m.

The group will report full year results on 2 April 2020, and projects underlying pre-tax profit to be in line with expectations.

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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.

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