The Saga (LSE:SAGA) share price has been performing rather well recently. Over the last five months, it’s up more than 170%. And over the previous year, more than 60%. That’s some impressive growth coming from a company that has been in severe financial distress for many years.
So what caused the Saga share price to start climbing? Will it rise even higher? And should I be adding the stock to my portfolio?
The rising Saga share price
Saga recently published its preliminary full-year results for 2020. And they’re quite promising. At least, I think so. With the vaccine rollout progressing quickly in the UK, travel restrictions are beginning to ease. And so it’s encouraging to see that advanced cruise bookings for 2021-23 are 20% higher compared to a year ago.
To me, this indicates that many over-50s (Saga’s primary customer age group) are eager to enjoy a long-overdue holiday. And given that the UK vaccine policy has prioritised over-50s, they’ll be able to do so safely. It’s worth noting that cruise travel bookings only represent a small portion of Saga’s revenue stream. But considering it was shedding customers not too long ago, I find this progress encouraging.
Its insurance business has also performed relatively well. After years of decline, the motor and home insurance segments finally began growing again, albeit by a small margin of 1.1%. While this is hardly substantial, it indicates the company might be improving the quality of its services, especially since customer retention rates have increased by 5.4% to 80.5% overall.
This report was well received by investors and so the Saga share price subsequently increased. While it’s too soon to tell, the new management team led by Sir Roger De Haan seems to be getting things back on track. Besides injecting £100m into the business, De Haan has restructured the company. This involved cutting the managerial layers down from 17 to five and reducing the employee count by 36%. Terminating employee contracts is never pleasant. But it has improved the operational efficiency of the firm and reduced losses by nearly 80%.
The challenges that lie ahead
The tough decisions made by new management are prudent in my eyes. But it has yet to fix all the problems created by the old management team, who openly admitted to being “overly focused on the short term”.
Saga still has an enormous pile of debt to contend with. As it stands, the company has over £820m of long-term obligations to repay. By comparison, based on Saga’s share price today, its market capitalisation stands at around £530m. Needless to say, it’s a highly leveraged business. And that creates a considerable level of solvency risk, especially since Saga is currently unprofitable.
The bottom line
The company has made some significant progress since the last time I looked at it, but there’s still a long way to go. And shareholder dividends will remain suspended for quite some time until debt levels are brought to a more sensible level.
But De Haan’s new strategy does sound viable to me and so far appears to be effective. With both the travel and insurance business divisions showing new-found growth, I believe this could be the start of a comeback for Saga. Therefore despite the high solvency risk, I think the Saga share price can continue to climb, and I would consider adding it to my portfolio.
