ii view: Saga not yet over the hill

Insurer and travel group Saga suffers a big profit fall, but maintains full-year guidance.

Half-year results to 31 July 2019

• Revenue down 8% to £396 million
• Pre-tax profit down 52% to £52.6 million
• Total net debt up 64% to £643 million
• Interim dividend down 56% to 1.3p per share

Chief executive Lance Batchelor said:

"We have made good progress against our strategic reset.  The sales of our 3-year fixed price insurance are encouraging, and a higher proportion of customers are coming to us direct. Spirit of Discovery is now fully operational, delighting customers, and delivering on our targets for filling additional cruise capacity into next year.

"We are pursuing a number of initiatives to further improve the performance of our insurance business.  In Tour Operations we are adapting to a challenging market by building on differentiated tours and river cruise. Our membership programme is starting to prove effective in helping us develop a deeper relationship with, and sell multiple products to, our members."

ii round-up:

With a history dating back over 60 years, Saga (LSE:SAGA) is today a specialist provider of products and services for people aged 50 and over. 

Headquartered in Folkstone, Kent, the company first and foremost operates an insurance broking business selling a range of insurance products including motor, home, travel and private medical cover, either from its own insurer and underwriter Acromas or from a panel of others. 

Second to insurance in profit terms, although its biggest revenue generator, Saga offers a range of holidays including cruises. In July, it launched its first-ever purpose-built cruise ship, Spirit of Discovery. 

Lastly, and under its Emerging businesses division, it also offers personal finance products such as savings accounts and loans, along with trialling a home care service.  

Following a savage profit warning and a move into losses during 2018, Saga has begun a transition programme to try and regain competitiveness. In insurance, it is attempting to move the conversation from price to value. New three-year fixed price insurance policies in motor and homes have been launched.

Half-year results materialised broadly in line with reduced expectations, with profits hit by challenges for both its insurance and travel businesses. But management did reiterate full-year guidance for adjusted pre-tax profit of between £105 million and £120 million, although down from £180 million in 2018. 

ii view:

Investors in Saga have suffered a torrid time. The share price has fallen by more than 60% over the last year. The dividend payment has been cut in half and its core insurance market has become even more competitive – Germany's giant insurer Allianz has recently bolstered its UK operations. 

The company is trying to turn things around. Major changes to management have been made, a new approach to insurance focused on growing direct channels is underway while its first cruise ship is active with a second now on the way. 

For investors, the fall in the share price now leaves the dividend offering appeal at over 8% (not guaranteed), while some early positives from recovery initiatives such as encouraging sales of its new three-year fixed price insurance policies offers hope. Indeed, the share price was up 10% in reaction to these results. However, buying now requires a high tolerance to risk. A decisive turnaround in the company's fortunes is, for now, too early to call, with a wait and see approach sensible.  

Positives: 

• Its targeted demographic – 50 and over – is growing
• Recovery initiatives have been implemented
• Significant changes to management made

Negatives:

• Brexit uncertainty overshadows customer travel demand
• Total net debt of £642 million compares to a stock market value of £560 million
• UK Financial Conduct Authority studying insurance industry pricing practices

The average rating of stock market analysts:

Buy