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Saga - back with a plan

Emilie Stevens, Equity Analyst | 10 September 2020 | A A A
Saga - back with a plan

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Saga's first half revenue fell 51.4% to £192.4m, primarily reflecting the suspension of the Travel business in March and lower travel insurance sales. Underlying profit before tax fell from £52.8m in 2019 to £15.9m this year, mainly reflecting a reduction in travel profitability.

The group also wrote down the value of some of its assets by £59.8m and incurred £28.3m in restructuring costs. These were offset slightly by some asset sales, but pushed the group to a £55.5m loss before tax, compared with a £52.6m profit last year.

Management is not proposing a dividend, and does not expect to for the next few years.

The shares fell 4.6% following the announcement.

View the latest Saga share price and how to deal

Our view

Coronavirus has been a near existential crisis for Saga's Travel division. And while the plan is to start cruising again this year, the future is still very uncertain. That's left the group relying on its insurance operations and available cash and credit to keep going.

To ease cash flow pressure Saga now intends to raise £150m in fresh capital, mostly from former CEO Sir Roger De Haan who will return to the board. The new money will be used to support the group's recovery strategy, and pay down debt.

Management has made a hard headed appraisal of Saga's failings over the last few years, and has announced a new five part strategy to turn things around.

The group will:

  1. Simplify its management structure and reduce headcount by around 23% in the longer term.
  2. Focus more on digital and data capabilities to better identify customer needs, and refresh the brand with a new marketing campaign in 2021.
  3. Optimise and invest in the core Insurance and Travel divisions.
  4. Lower costs across the business.
  5. Pay down debt.

We like management's honesty in assessing what went wrong before, and the new capital will significantly alleviate pressure on the balance sheet. It's reassuring to see a realistic plan in place, but the group still faces an uphill battle.

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.

The Travel division is currently burning cash, but should return to profitability once customers feel confident enough to travel again. The loyalty shown by current customers and the group's forward booking position are reasonably encouraging, but we'll have to wait and see how quickly things can get going again.

Saga's customer base of older people is a growing and wealthy demographic. Ultimately, this should be an attractive group to serve - if Saga can get the offer right. At the moment the outlook remains very uncertain and there's no guarantee Saga will succeed, but we're feeling a shade more positive than we did a few weeks ago.

Saga key facts

  • 12m forward Price/Earnings ratio: 3.7
  • Average 12m forward Price/Earnings ratio since listing: 10.6
  • Prospective yield: Saga is not currently paying a dividend

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First half results

Saga's Insurance Broking division generated £104.1m in written revenue, down from £129.0m last year, mainly due to a reduction in travel insurance revenue. Underlying earned profit before tax for the division fell 14.8% to £42.0m.

The Insurance Underwriting division's underlying revenue fell 4.4% to £92.3m. The group's current year combined operating ratio (the percentage of revenues paid in claims and other costs) rose slightly from 100.1% to 101.6% - indicating unprofitable underwriting. However, injury claims from prior years were lower than expected, meaning the division made an underlying profit before tax of £28.0m. The division's total combined operating ratio was therefore 72.4%, and improvement from 81.5% last year. Saga has seen fewer motor claims as a result of national lockdowns, but has not yet recognised this benefit in its results.

Revenue in the Travel division fell 77.5% from £219.0 to £49.3m, reflecting the impact of government restrictions. The division made an underlying loss before tax of £34.2m, compared with a £0.8m profit last year, despite a reduction in costs. Saga Holidays and Titan bookings for the 2020/21 year are 5.6% ahead of last year, and Cruise bookings are 7.7% behind, excluding customers that have chosen a voucher in place of a cancelled cruise. Management estimates the Travel division will "burn" £6m to £8m a month in the second half of the year.

Saga's net debt increased by £52.1m to £646.0m. Excluding cruise ship debt, the group's net debt to cash profits (EBITDA) ratio stands at 3.6x, within the 4.75x limit set by lenders. The proposed capital raise of £140m (net) will largely go towards debt reduction, and is expected to reduce the ratio to 2.3x. Without the new capital the company Directors judge there is a "material uncertainty that may cast significant doubt on the Company's ability to continue as a going concern".

Available operating cash flow was negative at -£23.2m, compared with a £24.9m inflow last year.

Find out more about Saga shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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 disclosure for more information.