Saga shares plummet, but is anyone buying?

Having seen Saga (SAGA) overhaul its brand in favour of a “fresher and younger” image, investors will today be asking what happened to the share price makeover!

The sideways performance of Saga shares since its high-profile flotation in May 2014 has long been the source of frustration for investors, and the high number of analysts with ‘buy’ recommendations.

But adding serious insult to injury, the stock today slumped below its 185p IPO price to stand at a record low of 135p after a profits warning wiped 25% off the value of the over-50s holidays-to-insurance company.

It’s a cruel blow for investors who have stuck with the business in the hope that Saga would finally fulfill City expectations for a price of 230p or more.

Today’s profits warning came in two parts, with the recent collapse of Monarch Airlines impacting the tour operations business to the tune of £2 million.

But there was also the blow of challenging trading in insurance broking, where a strong performance in motor has been partially offset by more difficult conditions in home and travel insurance.

Growth in underlying profits is expected to be between 1% and 2% for the year to the end of January, while the company is also forecasting a 5% drop next year due to the headwinds and an extra £10 million on customer acquisition costs.

Despite the downgrades, Saga said there was no change to its dividend policy and that this year’s pay-out was set to be in line with expectations. It’s already confirmed a 3p interim payout and UBS currently expects 8.93p per share for the full-year, implying a final dividend of almost 6p.

Chief executive Lance Batchelor said actions being taken now would result in a better quality of earnings and help support a progressive dividend policy for shareholders.

He pointed to a new claims platform and the renewal of its shipping fleet. “With greater customer insight and a stronger business platform, now is the right time for us to make targeted marketing investments to grow the business.”

UBS said the combined guidance for the two financial years implied underlying profits for the year to January 2019 will be 15% lower than its base case.

Analyst Robert Rampton said it may take time for the company to rebuild the trust of investors.

He added: “Saga has persistently traded at a discount to peers. We had expected the discount to close as Saga was able to consistently deliver the 5% profit guidance and rotate earnings towards broking.

“This year, and next, Saga is evidently not able to do that, and this raises concerns that the issues in home are more structural and growth elsewhere is insufficient to offset.”

Peel Hunt said today’s update highlighted the pains of Saga’s transition to an affinity broker model, where underwriting is passed to third party insurers.

It added: “The strategic move towards an affinity broker model continues to make sense. However, there are some short-term issues that still need to be addressed.”

Numis provisionally reduced its target price by 50p to 185p, which is based on a price/earnings (PE) ratio of 13.5 applied to the updated earnings guidance for the January 2019 financial year. This is down from the 15 previously forecast.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Source.