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Saga - cruise operations suspended following government advice

Sophie Lund-Yates, Equity Analyst | 13 March 2020 | A A A
Saga - cruise operations suspended following government advice

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On 12 March the government advised that over 70s and those with underlying health issues should refrain from going on cruises, following the coronavirus outbreak.

In response, Saga said it will suspend its Cruise operations until 1 May 2020. The group estimates this measure will reduce Cruise profit before tax by between £10m and £15m this year.

The shares fell 1.8% following the announcement.

View the latest Saga share price and how to deal

Our view

Saga is facing serious challenges.

The group 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 fallen heavily this year.

Increased price transparency and ease of switching has made general insurance an increasingly difficult sector to stand out in.

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.

At the moment, the focus is on the group's 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 insurance 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 may have at least stabilised.

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 led to a temporary suspension of operations and a hit to profits.

While we think the division is capable of recovering in time, there is an outside chance the memory of high profile outbreaks on ships will have a longer-term impact on demand.

All-in-all we think Saga has its work cut out. Only time will tell if attempts to revamp the insurance offering are enough to attract premium customers back. The company currently trades on a PE ratio of just 2.0 times, significantly below the longer term average of 11.3, and reflects the lack of confidence the market has in the group.

In our opinion investors should consider the substantial likelihood that no dividend is paid this year.

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Trading update

Saga reports that Cruise bookings have reached 80% of the group's full year revenue target. As of 11 March, the five remaining March departures were 79% booked, and the five April departures were 85% booked.

Advance customer receipts for the six week cancellation period are £22m. Saga confirmed it will be offering a full refund or future travel credits to affected customers.

The Insurance business has started the year well and management does not expect coronavirus to impact the division "significantly".

Saga had £33m of cash at the end of February and £100m of undrawn credit available. Two recently announced disposals are expected to generate a further £37m in cash in the first half of this year.

Find out more about Saga shares including how to invest

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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.