The Saga (LSE: SAGA) share price is up about 80% in the past year. The insurance and travel specialist caters primarily to people above age 50. The stock is on this investor’s radar as it will benefit from the reopening of the tourism industry in the UK.
I would like to see if it’s a good investment for my long-term portfolio.
The bull case for Saga’s share price
Saga has a new management team that is working on its strategic plan. The number of management layers has been reduced to reduce costs. It also plans to invest in technology. This is positive as any business needs to be tech-savvy. Next, it wants to focus on its core business, and reduce costs and debts. These should benefit the company in the long term.
The company had raised £150m last year which included £100m from the former chief executive and chairman Sir Roger De Haan. This gave De Haan a stake of around 20% and the role of non-executive chairman. In my view, this is positive since De Haan has a solid knowledge of the company founded by his father. Previously, he had sold this business to private equity in 2004.
The company has a loyal customer base. The over-50 segment forms a significant percentage of the total population in the UK. More importantly, they have higher disposable wealth. In my view, this is a big positive for the company and it seems an attractive target market to serve.
Next, around 74% of Saga’s travel customers and 52% of insurance customers are aged 70+. The company will have to worry less when the tourism sector opens, as most of its target group would have already been vaccinated. Many people are waiting for the long-overdue holidays. This is also evident as the company’s forward bookings are very strong. This should help the company to reduce the cash outflow in its travel business.
The bear case for the Saga share price
The company’s debt is increasing. Net debt (debt after reducing the available cash) rose from £593.9m in the previous year to £760.2m. This is a bit worrying as it is higher than the current market cap of about £540m.
The company derives the major part of its group revenues from the insurance segment. This segment has struggled in the past couple of years due to increased competition. Its market share in motor insurance has come down. Customers today compare online and choose the insurance company that gives the lowest quote. The company is working on products to retain its customers. Lower insurance quotes would put pressure on the company’s profits.
The final view
The company’s strategic plan is progressing well. It is too early to gauge success. So, I am not a buyer of the stock now. I would like to see how the company will reduce its debt. For now, I will keep the company on my watchlist.
