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Saga - getting ready to sail again as premiums fall

William Ryder, Equity Analyst | 14 June 2021 | A A A
Saga - getting ready to sail again as premiums fall

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Saga plc ORD GBP0.15

Sell: 278.80 | Buy: 280.40 | Change 11.80 (4.43%)
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In a brief trading update Saga said insurance policy sales were down around 2% in the key motor and home markets, though recent improvements mean sales are expected to be flat at the half year. Travel policies are down about 5%. Customer retention was 80% and margins per policy were in line with last year at £74 per policy.

The Insurance Underwriting division is recording fewer motor claims, which ought to boost the group's current year loss ratio by around 5 percentage points. Saga is also appointing Steve Kingshott as Insurance CEO, who will be joining from Tesco in the Autumn.

The Travel division's monthly cash burn came in at the lower end of the £7m-£9m guidance range in the four months ending 31 May. Cruising will resume on 27 June, and demand has been "outstanding" with 73% of cancelled bookings retained.

Saga has £78m in available cash and £100m in undrawn credit. Net debt (excluding ship debt) currently stands at £246m, or 2.9 times cash profits (EBITDA).

The shares fell 0.6% following the announcement.

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Our view

Coronavirus has been a near existential crisis for Saga's Travel division. And while the plan is to start cruising again soon, 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 has returned 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 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. 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: 13.1
  • Average 12m forward Price/Earnings ratio since listing: 10.4
  • Prospective dividend yield: 0.0%

All ratios are sourced from Refinitiv. 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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Full Year Results (07/04/21)

Saga's full year underlying pre-tax profit was £17.1m, down from £109.9m last year. However, including a reduction in the value of Travel assets, that would have been a loss of £61.2m - an improvement on the £300.9m loss recorded last year.

Management's focus remains on cash preservation and debt control, while also making progress in insurance and keeping Travel operations ready to restart. Given the uncertainty, management is not providing more detailed guidance, and there's currently no dividend.

Profit before tax in the Retail Broking division was £75.9m, down from £90.2m last year. The fall was due to Covid-19 disruption, especially in Travel insurance, and the sale of Bennetts - Saga's insurance biking brand. Saga branded policies fell 5.6% to 1.7m and total policies fell 9.4% to 1.9m.

The Insurance Underwriting division saw net earned premiums fall 6.5% to £183.4m. The group's current year combined operating ratio - the percentage of premiums paid out in claims and costs - fell from 103.4% to 91.4%. Once prior year reserve releases are included, the combined ratio fell from 83.0% to 70.8%. Management attributed the improvement to a reduction in driving during the year's lockdowns.

Revenue at the Travel division fell 88.9% to £51.6m and the division made an underlying loss of £78.5m, compared with a profit of £19.8m last year. Saga said it's seen high levels of customer loyalty, with 73% of Cruise advanced receipts being transferred to a future booking and 43% of Tour receipts. Forward bookings are down 52% in Tour Operations and 20% in Cruise.

At year end Saga had £75m in available cash, and access to a further £100m in credit. Excluding the cruise ships, year end net debt stood at £246.9m, down from £361.7m in January 2020. The reduction primarily reflects the group's recent capital raise, cost control efforts and asset sales. Total net debt stood at £760.2m, up £166.9m on last year. Available operating cash flow for the year fell 96.3% to £3.4m.

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 Refinitiv. 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.