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Esure surges on bid approach: here’s why the Saga share price could be next

After a period of intense speculation, motor insurance company Esure (LSE: ESUR) has become the subject of a bid approach. It has agreed terms with Bidco, which is a subsidiary of funds managed by Bain Capital, on a recommended all-cash offer for the entire company. Bidco has announced its firm intention to make an offer of 280p per share, which values Esure at a 37% premium to its closing price on 10 August.

Since Esure has traded at a relatively low valuation in recent months, a bid approach is not a major surprise. With Saga (LSE: SAGA) appearing to offer a wide margin of safety, it could realistically become a bid target over the medium term.

Improving performance

Alongside the bid approach, Esure released interim results on Tuesday. They showed that the company’s gross written premiums increased by 12% to £440.3m, with in-force policies up by 8.5% to 2.449m. Profit before tax was down from £45.1m in the first half of 2017 to £36.1m in the first half of 2018. However, this includes an impact of £14m from adverse weather-related claims costs in the home and motor accounts. Excluding those items means that profit before tax was £50.1m.

Overall, the performance of the company continues to be positive. But even at an offer price of 280p per share, the stock seems to be relatively undervalued. It puts the company on a price-to-earnings (P/E) ratio of 14.3 for the current year. And with a bottom line that is due to rise by 15% next year, a price-to-earnings growth (PEG) ratio of 1 suggests that the buyers of Esure may be getting a bargain.

Bid potential

As mentioned, Saga could become a bid target due in part to its low valuation. The over-50s travel and insurance specialist trades on a P/E ratio of around 10, which suggests that it offers a wide margin of safety.

Of course, the company has experienced a difficult period in the last year. Its financial performance has disappointed, with a profit warning providing evidence of difficult market conditions as well as scope for operational improvement. It is now targeting investment in customer growth, and a recent update suggested that it is performing in line with expectations. Despite competitive insurance markets, it is delivering growth in insurance policies. Similarly, demand for its tour bookings remains relatively robust.

With Saga due to return to positive earnings growth next year, the company’s outlook appears to be improving. Although there is still some way to go with its turnaround, it now appears to have a stronger growth strategy than in the recent past. With such a low valuation and the potential for a tailwind due to an ageing population, it would be unsurprising for the company to become of greater interest to potential buyers over the medium term. And even if it doesn’t, its investment potential remains high.

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Peter Stephens owns shares of Saga. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.