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Saga - Improved performance but profit outlook downgraded

The group returned to a positive underlying pre-tax profit of £14.0m compared to a loss of £2.8m...

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The group returned to a positive underlying pre-tax profit of £14.0m for the first half compared to a loss of £2.8m last year. This was supported by reduced losses in Cruises and Travel. The insurance division's maintained profitability, albeit at reduced levels compared to last year.

On a reported basis, the group did experience a loss of £257.5m as it took a previously flagged goodwill impairment charge on insurance that reflects the outlook for margins on home and motor policies more competitively.

The group maintained its outlook on cruises, travel and expenses for the full year, but saw inflationary pressures within the insurance market having largest than expected impacts. The group revised down its full year underlying pre-tax profit guidance to £20-£30m, down from £35-50m.

The shares fell 20.4% following the announcement.

View the latest Saga share price and how to deal

Our view

The recovery of Saga's Travel division has yet to see this part of the business return to profit. All the while the part of the business that is making money, insurance, is suffering from big inflationary pressures. The half year news of an earnings downgrade has seen the value of Saga's shares plummet to an all time low.

To ease cash flow pressure during the Pandemic Saga's raised significant funds - including a £250m lump from issuing bonds, with the proceeds being used to refinance debt. But perhaps that just kicked the can down the road. The group has two corporate bonds maturing in 2024 and 2026 worth £150m and £250m respectively. The forward indicators for Cruise and Travel are promising, particularly in Cruise, and the digital strategy carries on a pace with more bespoke product launches in the pipeline.

Notably a big part of management's initiatives in travel revolve around cost cutting and efficiency. So far things have gone the other way with increased marketing spend offsetting operating cost reductions. It's not something we're worried about just yet - these initial costs are to be expected as the group nurses its pandemic-inflicted wounds, but it's something to keep an eye on moving forward.

Personal insurance is a tough market to be in, and increased price transparency and ease of switching has made it more 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 given the first half performance these worries persist. This is being compounded by rising claim levels.

Rule changes coming from the Financial Conduct Authority also have the potential to cause volatility in the future.

The Travel division is currently burning cash, but should hopefully return to profitability next year. The loyalty shown by current customers and the group's forward booking position are reasonably encouraging for now.

It's worth noting that Saga's dividend is suspended. That's because its lenders won't allow it to 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 likely the right move, but means shareholders aren't being paid for their patience and we're not expecting a return to pay outs any time soon.

Overall, Saga's in a much better position than it was a few months ago. With a return to profitability still a glimmer on the horizon, investors are starting to see a light at the end of the tunnel. We do buy into the strategy of creating a Superbrand for older people in the UK. Still, there's a lot of work to be done and that's reflected in a valuation that's well below the long-term average and until clarity emerges over debt repayment plans we expect continued pressure on investor sentiment.

Saga key facts

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.

Half Year Results (Underlying)

The Cruises and Travel division, which includes Travel, Ocean and River Cruises, reported a pre-tax loss of £11.6m, an improvement from last years £51.2m loss. This was supported by revenue rising more than 12-fold to £136.2m (H1 2021 £10m) as ocean cruises removed all temporary COVID-19 measures. Ocean cruises, excluding the impact of customer refunds and two cancellations due to COVID-19, were 71% filled during the period. River cruises remained impacted by the Omicron variant of COVID-19 as well as conflict in the Ukraine. The travel business, which includes Saga Holidays and Titan brands, saw customer volumes increase from 1,000 to 21,000.

Retail Broking (insurance) had pre-tax profit of £35.5m, a 6.3% fall from last year as gross underwriting premiums fell 1.8% to £277.7m and marketing expenses rose 5.1% to £12.4m. This reflects a fall in Motor premiums by 10.9%, Homes by 5.4%, which was partially offset by 35.2% increase in Other. 'Other' benefitted from the recovery in sales of travel insurance.

Net earned premiums fell 11.5% to £74.4m in the Insurance Underwriting division, reflecting a 5.3% reduction in volume with a 6.5% decrease in average earned premiums. Pre-tax profit came in at £16.4m, 47.3% below last year. The underlying combined operating ratio, which looks at the percentage of premiums paid out in claims and costs, worsened from 88.4% to 110.2% as the first half of the prior year benefited from significantly reduced motor claims frequency due to customers driving fewer miles during the COVID-19 lockdown.

Saga had a free cash outflow of £22.1m, compared to an inflow of £26.1m last year. Net debt stood at £721.3m, £7.7m lower than at the beginning of the financial year. The group has two corporate bonds maturing in 2024 and 2026 worth £150m and £250m respectively.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 27th September 2022