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Saga - greater clarity

Nicholas Hyett, Equity Analyst | 22 June 2020 | A A A
Saga - greater clarity

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As of 31 May Saga had £30m of cash, down from £92m on 31 March as the group supported its Travel business. The group has £50m of undrawn credit.

Saga has ring fenced an additional £45m for the tour group, covering 87% of the money already received from customers. The group has arranged for a debt holiday for its ship facilities, although no dividends can be paid while the deferred payments are outstanding. Saga also intends to sell Bennetts Motorcycling Services for £23m by the end of July, subject to regulatory approval.

The group doesn't think it will breach its agreements with its lenders in the next year, but if travel is not resumed this year it may need to take "further actions" to make upcoming debt maturities.

The shares rose 7.7% following the announcement.

View the latest Saga share price and how to deal

Our view

Saga is facing very serious challenges.

The Travel division has essentially been shut down until at least August, and perhaps longer. Management thinks it can weather this disruption if travel returns before the end of the year and demand recovers slowly after that. This means relying entirely on the Insurance division, the group's cash reserves and available credit.

The group was at risk of breaching its agreements with lenders, which would have pushed it into a technical default. To try and avoid this outcome management has renegotiated its covenants on fairly punitive terms. If the net debt (debt minus cash) to cash profits ratio, excluding the cruise division, rises above 3.0 times Saga will not be allowed to pay any dividends to shareholders. The same is true as long as the deferred payments for its ships are outstanding.

Furthermore, it must pay down its debt aggressively to reach this target. The repayment schedule means the group may be required to dedicate all cash profits to debt repayment. This could leave almost nothing to invest in the business for the foreseeable future.

The group's bankers have in one sense been reasonable in renegotiating, but they are standing by to extract far more than just a pound of flesh in compensation.

If the disruption is short-lived the group will have suffered a severe wound, but will probably survive and eventually return to profitability. Shareholders could be rewarded for weathering the current storm.

But if the disruption continues, or high profile coronavirus outbreaks on cruise ships have permanently reduced demand, the group is in real trouble. If net debt approaches the maximum allowed, then the group will be unable to invest properly to restore what was, frankly, an already struggling business. Even in a best case scenario the lack of investment could hamstring operations in the long run.

While the pain may be focussed on the embattled Travel division, Insurance is equally important. It provides the cash profits that net debt is measured against. Mercifully, COVID-19 isn't having any real impact on this division, but it's still not in the greatest shape.

Personal insurance is a tough market to be in, and increased price transparency and ease of switching has made it increasingly difficult to stand out. We've worried for some time that Saga's brand doesn't resonate with the younger end of its 'over 50s' customer base, and the damage to the cruise division may make this worse.

In our opinion, an investment in Saga hinges on the length of the COVID-19 disruption. If it's short lived the group might get back on its feet, but if not the group may suffer a blow it is unable to fully recover from.

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Trading update for 1 February to 21 June

SAGA has written 567,000 motor and home insurance policies, reflecting a 1% rise thanks to stronger retention. Motor and home margins fell £6 to £68, in line with expectations. Current year claims are down significantly as fewer miles have been driven during the lockdown. Total insurance policies fell 5% to 620,000 due to a "significant" decline in travel insurance policies.

The Travel division has been on pause since mid-March and departures up to the end of August have been cancelled, although the group still expects some travel to resume this year. The group described Cruise customer loyalty as "exceptional", with 70% of advanced customer payments retained by the group. Nonetheless Saga has had to refund £44m of advance receipts, largely in the Tour business.

Find out more about Saga shares including how to invest

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.


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