The Saga (LSE:SAGA) share price is rising today (over 8% at the time of writing) on the news that activist investor Elliott Management Corporation has taken a 5% position in the firm. What could be its motivation? Rumours include an asset break-up, management shake-up or simply that Saga is undervalued and Elliott wants a piece of the action.
And it is action with strong potential in theory, despite recent struggles. Saga’s target customer base for its holidays and insurance products consists of retirees, a growing demographic. It is a well-established and trusted brand with 97% recognition among the UK’s over 50s and a customer base of 2.6m. I think it would be a shame to see it broken up, but there is no doubt the company is in need of some serious change.
Testing times
Last month, CEO Lance Batchelor announced he was stepping down after six years with the company. Shortly afterwards, Saga, which first floated in 2014, was pushed out of the FTSE 250 index into the FTSE SmallCap index.
A few weeks ago, the firm warned that discounting was taking a toll on both its tours business and insurance premiums and by mid-June, the share price hit an all-time low of 33p. Lower insurance margins, renewal pricing restructuring and investment in new products, along with Brexit uncertainty affecting holiday bookings, meant underlying pre-tax profit in 2020 was expected to fall to £105m to £120m.
In response, Saga launched an overhaul of its insurance business, spending more on marketing and unveiling a three-year fixed price product to entice additional customers. Since the mid-June low, the price has slowly risen again and early signs suggest that the new three-year insurance plans are selling. This all means earnings should be higher for the company than expected.
The news that Elliott has taken a position gives hope that a turnaround is afoot. Or does it? Elliott, with assets under management of about £28.2bn has a 40-year reputation for building up minority stakes in takeover targets and does not shrink from a fight, so maybe its motivation is about more than just spotting a good investment. However, it would need a bigger stake if it wants a voice in, say, choosing the next CEO. Saga’s divisions include insurance, healthcare, retirement villages, travel and financial services so there is plenty that could be split off.
The bottom line
At approximately 46p per share, the book value per share of 86p looks like Saga’s price could now offer a substantial discount to future cash flow value.
The company has a debt ratio of 0.58, which is not ideal as a high debt ratio (0.6 or higher) makes it more difficult to borrow money and Saga is very close to that figure.
Annual EPS was negative at -14.5p as of January, compared with 13.1p a year earlier.
In April when the company issued its latest profit warning, it also said it would cut its 2019 dividend to 4p per share from 9p. At today’s share price, this gives it a very high 9% yield.
It will take time to see the effectiveness of the insurance turn around plan, and finding a new CEO will have to be prioritised, but I believe positive changes are being undertaken to move in the right direction. I consider this a buy.
