Saga plc (SAGA) ORD GBP0.15

Full year revenue to January 2023 is expected to be 40-50% ahead of the prior year, with underlying profit before tax toward the lower end of £20-£30m.

The Ocean Cruise business benefitted from improved demand and lower pandemic related impacts. Full year load factor (how full the ships were) was around 75%, compared to 68% for the prior year. Annual revenue from the division has more than doubled.

The relaunched Travel business is expected to report a small underlying loss, as a tenfold increase in revenue wasn't enough to drive the division into the black. As at 22 January, booked revenue for 2023/24 was £110m, 13% ahead of the same point last year.

Insurance continues to face challenges as the competitive market keeps a lid on prices, but the cost of claims increases. Total in force policies and policy sales are expected to have fallen 3% over the year, largely a result of weakness in motor and home insurance which was somewhat offset by a recovery in travel insurance.

In Underwriting, claims inflation is estimated to be running at 13% and Saga has taken actions to reprice its motor book in response.

Year-end available cash is expected to be around £140m, lower than expected due to the timing of cash flows - expected to reverse next year. Net debt is expected to be slightly higher than at the half year mark, which stood at £721.3m.

The shares were up 3.5% in early trading.

Our view

Saga's recovery isn't a straightforward one. The over-50's group, with exposure to cruises, travel and insurance, is struggling to fire on all cylinders. The cruise and travel division are mounting a recovery from pandemic lows, but pressure on the insurance arm is mounting.

Notably, management's initiatives in travel focus on cost cutting and efficiency. As at the half year mark, things had 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.

The revamped travel proposition will see its full launch in February. Demand looks promising and we'd hope to see profit return to the division over 2023.

Saga's also involved in personal insurance. A tough market to be in as 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.

More broadly the insurance industry is under pressure. The cost to service claims is increasing whilst fierce competition means providers haven't been able to raise premiums at the same rate. That pushes margins down, especially true in the motor and home markets.

It's not too surprising then, to hear there's a potential sale of its underwriting business on the cards. Acromas currently underwrites around 25-30% of the insurance business and a sale could generate between £80-£90m in proceeds. Cash needed to bring down debt levels.

That brings us nicely to the balance sheet. 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.

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, trading is improving, and we commend management for taking proactive actions to revitalise Travel and address the insurance underwriting exposure. We're yet to be too convinced that the so called "Superbrand" for older people in the UK is a business model with strong enough foundations to thrive. Those concerns, plus the need to fix the balance sheet, are reflected in a valuation that's well below the broader sector.

The Share Research team is ceasing covering of Saga. This is the last update and house view HL will produce on this stock. You can still find out more about our thoughts on the Financials industry by signing up to our Share Insight email.

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