The last time I covered Saga (LSE: SAGA) shares, on 22 July, I said I thought the best move for investors was to avoid them. The company’s debt levels concerned me and with the travel side of the business decimated, I concluded that the shares were too risky to buy.
In hindsight, that call was bang on. When I penned that article, Saga’s share price was 17p. Today, it stands at just 10.5p. Hopefully, my article saved a few investors from losing money.
Given that Saga’s share price is now near all-time lows, I’m going to take another look at the investment case. Is the stock worth buying for a recovery, or do I think should you continue to avoid it?
Why has Saga’s share price tanked?
There are a few reasons Saga’s share price has fallen recently. One is that interim results were terrible. For the six months ended 31 July, the company posted a loss before tax of £55.5m. By contrast, in H1 2019, the group posted a profit before tax of £52.6m. Operating cash flow this time was -£23.2m, compared to £24.9m the year before. Meanwhile, adjusted net debt came in at £410.7m, up from £397.9m at 31 July 2019, resulting in a net debt-to-EBITDA ratio of 3.6.
Another reason Saga shares have fallen is that the company has raised money to bolster its financial position. Recently, it announced that it raised approximately £150m by issuing 972m shares. This will have diluted existing investors’ holdings. It’s worth pointing out that a large number of shares were bought by former CEO Sir Roger De Haan who is the son of the founder. As a result, De Haan – who has been appointed as Non-Executive Chairman – now owns about 26% of the company.
Turnaround plan
Looking ahead, Saga has plans to turn things around. According to the company, its new, strengthened management team has developed a “compelling turnaround strategy.” Saga says it has plans to create a “refreshed, contemporary and confident brand position” and to invest in data and digital to improve the customer experience. It says it is confident that this strategy will see the business return, in time, to sustainable growth and that it will restore significant value for shareholders.
This all sounds great, but let’s face it, the group is going to have its work cut out to turn things around.
For a start, the cruise side of the business faces enormous challenges due to Covid-19. Recently, Saga advised that most countries around the world are not accepting cruise ships and it does not see this changing for the remainder of this year. As a result, it has extended the suspension of its cruising operations until early next year.
Secondly, the group has to deal with its massive debt pile. Its aim is to get this down to a more manageable level. However, progress here is likely to depend on the pace of recovery from Covid-19. It’s worth noting that the group says that as a result of the debt, it is not expecting to pay dividends in the next few years.
My view on Saga shares
Saga may be able to recover from the current situation. However, a recovery is not guaranteed. A lot will depend on Covid-19.
Weighing everything up, I think the best move is to continue avoiding Saga shares.
