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Saga - pre-tax loss in-line with expectations

Sophie Lund-Yates, Equity Analyst | 22 September 2021 | A A A
Saga - pre-tax loss in-line with expectations

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Saga plc ORD GBP0.15

Sell: 278.80 | Buy: 280.40 | Change 11.80 (4.43%)
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Saga reported an underlying pre-tax loss of £2.8m in the half year, compared to a profit of £15.9m last year. This was in-line with expectations and reflects a "stable" performance in Insurance, offset by the suspension of the travel business, and costs associated with restarting operations. Some cruises restarted in June, while international trips resumed in August.

The shares rose 1.6% following the announcement.

View the latest Saga share price and how to deal

Our view

Coronavirus was a near existential crisis for Saga's Travel division. And while ships are leaving ports once more, 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 been busy raising money - the most recent being a £250m lump from issuing bonds, with the proceeds being used to refinance 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
  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. Debt is coming down, and any immediate concerns over financial viability have been allayed. But we're a little disheartened by the lack of detailed progress in the latest round of results on other parts of the plan. While the turnaround continues, there's an ongoing 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, and governments allow ships to sail at full capacity. 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 properly again.

It's worth noting that Saga's dividend is suspended. That's because its lenders won't allow it pay dividends until debt comes back down, and even once that level's reached, we suspect Saga will want to continue funnelling funds elsewhere for a while. That's the right move, but means shareholders aren't being paid for their patience.

Overall, 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

  • Price/earnings ratio: 8.3
  • Average Price/earnings ratio since listing (2014): 10.4
  • Prospective dividend yield (next 12 months): 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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Half year results

Pre-tax profit fell 9.8% in the Retail Broking business to £37.9m, as brokered gross written premiums fell 15.5% to £175.8m. This reflects disruption to "other" insurance, which includes private medical and travel insurance. Home premiums fell 0.8%, and Motor fell 33.4%, largely reflecting the effect of disposals. Saga-branded motor and home policies increased by 0.5%.

Underlying net earned premiums fell 9.1% to £84.1m in the Insurance Underwriting division. That came as there was a 7.8% fall in the number of policies underwritten, and a smaller decrease in pricing. The underlying combined operating ratio, which looks at the percentage of premiums paid out in claims and costs, improved from 101.6% to 88.4%. This is because of fewer people on the roads during lockdown, and the trend is expected to reverse.

Travel revenue fell from £49.3m to £10.0m. Cruise ships began to sail again at the end of June, but business was held back as social distancing meant the ships could initially be only half full. 74% of Cruise advanced receipts have been transferred to a future booking. Marketing costs have increased 26.9% as the group ramps up to support the restarting of operations. The monthly cash burn was £5.9m, lower than guidance of £7m-£9m. There was an underlying pre-tax loss of £51.2m, compared to a £34.2m loss last year.

Saga generated £26.1m of free cash flow, compared to an outflow of £92.2m last year.

Saga issued a £250m five year bond in July, with the proceeds used to repay existing debt facilities. Net debt of £740.3m was about £20m less than at the start of the financial 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 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.