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Saga - travel still suspended

Sophie Lund-Yates, Equity Analyst | 26 January 2021 | A A A
Saga - travel still suspended

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Saga plc ORD GBP0.15

Sell: 362.00 | Buy: 362.80 | Change -7.40 (-2.00%)
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Saga expects to report underlying pre-tax profit for the full year. That reflects modest progress in the Insurance business, offset by continued disruption in Travel. The monthly cash burn in the Travel business is at the lower end of the £6m - £8m guidance range.

The group said its "near-time priorities continue to be to manage costs and preserve cash".

The shares fell 1.9% 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 has raised £150m in fresh capital, mostly from former CEO Sir Roger De Haan who will return to the board. The new money is being 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 has significantly alleviated 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.

Saga key facts

  • 12m forward Price/Earnings ratio: 7.5
  • Average 12m forward Price/Earnings ratio since listing: 10.3
  • Prospective dividend 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.

Trading statement details

In the Insurance Broking division, Saga-branded Motor and Home policy sales are expected to rise 1% at the full year, to 1.6m. This reflects a higher customer retention rate, but new business growth was held back by the group's pricing strategy, although this is expected to improve margins. Direct customers now account for 59% of new business. Total policy sales have fallen 6% to 1.7m, because of weak demand for travel insurance.

The Insurance Underwriting division has enjoyed the same reduction in motor claims frequency as the rest of the industry. This is expected to improve the group's combined ratio by five percentage points before reinsurance agreements. Large claims from prior years have undershot expectations, so the group will continue to release its reserves during the second half, albeit at a lower rate.

Travel remains suspended, although the group stands ready to resume operations at short notice. Customer retention is up in Cruise, with an average of 69% of customers rebooking instead of taking a refund. This figure recently rose to 86%. The group has taken £140m in cruise bookings, equal to 68% of the 2020/21 revenue target and 28% of the 2021/22 target.

At year end Saga had £51m in available cash and access to a further £100m in credit. Excluding the two cruise ships, net debt stands at £271m, down from £411m in July 2020. The reduction primarily reflects the group's recent capital raise. Total net debt currently stands at £785m. Saga is continuing to negotiate with its creditors for more relaxed terms.

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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 for more information.