Saga Group, the holidays-to-insurance group tailored for the over 50s, this week announced its intention to float on the London Stock Exchange. Saga is planning to offer at least 25% of its equity for around £550m, thus potentially valuing the entire group at £2.2bn.
Saga is following in the footsteps of Royal Mail (LSE: RMG) and Direct Line Insurance (LSE: DLG) by offering retail investors the chance to participate. The minimum application size for the retail offer is £1,000. And, if you’re a Saga customer or employee, there’s an added bonus of one free share for every 20 acquired.
As a happy customer myself — Saga got my grey pound when I switched car insurance from Aviva after turning 50 a couple of years ago — the flotation has piqued my interest. This is a great brand, with strong customer loyalty. Indeed, Saga claims that no fewer than 700,000 of the company’s 2.1 million customers have registered an interest in applying for shares.
Valuation
I’m sure there will be heavy demand for Saga’s shares, but will they be good value at the flotation price? I’m certainly not expecting the giveaway we saw with Royal Mail, but, in any case, Direct Line is a better comparator, as prices tend to be set by reference to a company’s sector peers.
Direct Line was ‘priced to go’ when floated 18 months ago at 175p on a P/E of 10.5. Today, at 251p, the P/E is 12, just a little below the sector average.
However, Saga is more than an insurer. Cruises and holidays, and domiciliary and primary healthcare are among areas the group also operates in — categories that attract markedly higher earnings ratings than insurance.
Because of its diverse revenue streams, Saga anticipates being officially placed by the FTSE within the specialised consumer services sub-sector of the index. Here, it would have just one official peer: funeral services group Dignity (LSE: DTY), which currently trades on a P/E of 20.
Will the price be right?
Obviously, it would suit potential investors in Saga like me to have the company priced as an insurer, while it would suit the sellers to have it priced like Dignity, or equally highly-rated companies, such as cruise operator Carnival.
As the sellers hold all the cards, I suspect we could see Saga priced on a rating of 18-20 times earnings. Like me, I reckon a lot of those over 50s customers who have registered an interest in acquiring shares will also be interested in the dividend. The potential P/E gives us a handle on the income yield, because Saga has already told us its dividend policy.
The company intends to adopt a progressive policy, with an initial payout ratio of 40%-50%, which on a P/E of 18-20 would imply a below-market-average yield in the range of 2%-2.8% — more in line with the likes of Carnival (2.5%) than Direct Line (5%).
While I think Saga is a great business, and deserves to rate at a premium to Direct Line, I’m awaiting the detailed financials that will appear in the full flotation prospectus, which should be published shortly. I’ll be looking to do a sum of the parts analysis to establish what I think is a reasonable earnings rating to pay for the shares. Also, at the likely level of the dividend, whether it looks safe, and the potential for growth.
