Holiday and insurance specialist Saga (LSE: SAGA) has put on almost 70% since the start of January. Over the past year, the Saga share price shows a 76% return. Those seem impressive numbers.
Here I dig into the prospects for Saga. I also explain my thought process about the prospect of buying into the shares.
Long-term problems for the Saga share price
While the recent price movement has been positive, longer term, the picture looks different.
The business had struggled in recent years. The pandemic was simply the latest in a series of negative drivers for the share price. It took a high toll, though.
Saga’s focus on travel was already damaging enough for its prospects, given the pandemic’s impact on tourism. But its target group of older travellers was even more challenging. Older people are most at risk from Covid-19 overall. So some analysts worried that these customers would be the slowest to return to the travel market.
Righting the ship
The company has taken measures to improve its position. The former chief executive returned to chair the business. Over the past year, headcount has been cut 36%. Seventeen management layers have been reduced to five.
There have also been moves to shore up Saga’s capital position. A rights issue last year diluted shareholders, but raised £138.7m net of costs.
Prospects improving
The Saga share price has weighed anchor this year – but its ships have not. As it owns its vessels, the ongoing suspension of cruises is a costly inactivity.
But with vaccinations rolling out, I expect travel to return this year. The company said it expects to relaunch its brand later next year. It will require cruise passengers to be fully vaccinated. I think that should boost confidence, although I think it needs to communicate more about its crew vaccination policy too. It also plans lower capacity cruises at first, which could also help restore confidence.
The company’s insurance business has held up fairly well. After several years of decline, motor and home policies last year recorded slight revenue growth.
Saga share price challenges
Despite nascent signs of future recovery, a number of factors continue to pose risks to the Saga share price.
Net debt of £760m is more than the company’s market capitalization and grew by £166m last year, despite the share placing.
The company said last year that it was not expecting to pay dividends “in the next few years”. Under a repayment holiday on its ship debt, it is currently not permitted to pay dividends anyway. I am more attracted to income choices elsewhere.
Additionally, the outlook for the older cruise market remains unclear. As the owner of two recently built cruise ships, the company’s success relies on a return to high demand levels if not necessarily those seen before. I do think cruising will come back, even amongst older cruisers. But I expect it to be a slow, cautious process.
I’m not tempted
Saga shareholders have had a good ride lately. With the likely return of travel this year, the Saga share price could well keep rising.
However, an uncertain demand picture, high debt and costly ship maintenance put me off. I’d rather focus on finding reopening shares where the short-term future is clearer – and more profitable.
