It has been a truly brutal few years for shareholders of Saga (LSE:SAGA), the provider of package holidays, cruises, insurance, and financial services targeted at the over-50s market. The Saga share price has plummeted over 75% from its highs in 2016, leaving investors nursing heavy losses. So what has gone so disastrously wrong for this one-time market darling?
What happened?
The firm has been buffeted by a perfect storm of adverse factors. Brexit uncertainty dented consumer confidence and travel demand, while increased competition in its core insurance business from upstart digital rivals took a toll. The pandemic then proved a huge body blow, with cruise ships impounded and travel bookings disappearing almost overnight.
Although travel has recovered as Covid fears have receded, the firm is now battling a variety of economic factors. These include the high cost of living, significantly squeezing its customers’ disposable incomes and raising its own costs.
The company’s latest annual results summed up the struggle. Revenues were down 10% versus pre-pandemic at £754m, with a £113m loss. With losses mounting, management was forced to tap shareholders for a whopping £195m in a deeply discounted rights issue to bolster its finances. Even after this cash injection, the balance sheet remains leveraged with £770m in debt.
Signs of optimism
So is there any light at the end of the tunnel for long-suffering investors? The company is taking steps to downsize, exiting some uneconomic tour operating channels and reducing headcount by 18% to save £35m annually. It sees growth opportunities in areas like private medical insurance and home services tailored to its core over-50s demographic. This is somewhat reassuring, with population demographics suggesting this could be a real boom area in the future.
Let’s take a look at the numbers, namely the price-to-sales (P/S) ratio, since the company is unprofitable. The ratio of 0.2 times is much lower than rivals in the sector, with a ratio of about 1.1 times. There is clearly a lot of negativity around this company, but at some point, the share price could start to make sense to even the most sceptical investor.
Analysts generally forecast a return to profitability next year. The company itself forecasts very healthy annual growth in earnings of 50% over the coming years. This is well above the average of the sector at 12.3%, but estimates have proved wildly unreliable when it comes to the company. “Saga remains in turnaround mode but visibility is low“, one broker cautioned. Even if profits recover, the heavy debt load could mean any gains get captured by creditors rather than equity holders.
Overall
With the Saga share price trading at just a quarter of its 2017 peaks, some contrarian value investors may be tempted to take a gamble on a turnaround. But the road ahead looks challenging. With intense competition from younger, digital-savvy rivals, economic challenges, and a precarious balance sheet, I’m not hopeful. Shareholders have endured a trying odyssey — and their battered investment may unfortunately never regain its former glory days. I’ll be staying clear for now.
