The Saga (LSE: SAGA) share price has been on a tear recently, rising 55% since my last update in January. After making allowance for the new shares issued in September’s fundraising, I estimate shares in the over-50s travel and insurance group have now risen by about 25% over the last year.
That doesn’t seem like a bad performance to me, given that the firm’s travel business has been shut down for most of this period. I’ve previously considered this stock as a potential value buy. But after such rapid gains, I’ve decided to take a fresh look. Do I still think Saga shares are cheap?
Debt deal reassures me
Back in September, former CEO Sir Roger De Haan invested £100m in the business and came on board as chairman. This formed part of a £150m fundraising that was intended to strengthen Saga’s balance sheet and get the company through the pandemic.
That new money did most of the heavy lifting required, but Saga still had some debt. With the travel business potentially closed down until the second half of this year, I could see some risk here. The firm needed to persuade its lenders to relax their terms until business returned to normal.
Fortunately, this issue has now been fixed. In an update on Friday, Saga said its lenders had agreed to defer repayments on cruise ship debt and relax the terms on its bank debt until mid-2022.
There are a few strings attached to these changes, including dividend restrictions. But there’s nothing too worrying for shareholders, in my view. I now feel confident Saga’s financial situation is secure and should support the business until holiday operations restart.
Saga share price: still low?
After such a rapid increase, are Saga shares still cheap? I’ve been looking at the company’s past profits and forecast earnings to try and get a feel of what normal profits might look like.
Between 2014 and 2018, Saga’s net profit averaged £133m per year. At the time of writing, its share price of 406p gives a market-cap of about £560m. That values the stock at around four times 2014-18 average profits.
That would be pretty cheap, in my opinion, but can profits return to historic levels?
The latest consensus forecasts I can find suggest the firm will report a profit of £39m in 2022 and £78m in 2023. These price Saga shares at 15 times 2022 earnings and around seven times 2023 forecast earnings.
My verdict
Saga’s cruise business has a high profile but, historically, most of the group’s profits have come from insurance. In 2018/19, for example, travel generated an underlying profit of £21m, versus £193m for insurance.
Although I expect the travel business to perform well after the pandemic, I think it’s harder to predict the future performance of the group’s insurance business. This over-50s offer faces tough competition from bigger rivals. Keeping prices competitive without economies of scale could put pressure on profit margins.
I can see the potential for Saga’s profits to recover to the levels seen in the past, but there’s no guarantee this will happen.
For me, Saga’s share price is probably high enough at the moment. I won’t be buying the stock at this level, but I wouldn’t rule out further gains over the next few years.
