Some companies seem to be set fair, then it all goes wrong. Strengths become weaknesses, and unexpected threats emerge. That’s been the case with over-50s travel and insurance business Saga (LSE: SAGA), which has failed to live up to the high hopes investors placed in the stock when it floated in 2014.
What a Saga!
Its strong brand, broad customer base and wealthy target demographic all seemed to bode well. The result? The Saga share price is down three quarters over five years. Although some argue it was hit too hard.
But there’s good news today with the stock up 12% after what would normally been seen as a rather underwhelming set of results. That’s the benefit of low expectations for you.
The £572m FTSE 250 group posted a 52.1% drop in pre-tax profits to £52.6m for the six months ended 31 July. Total net debt rose 64.3% to £642.9m, although primarily due to the additional £245m borrowed to fund the purchase of new cruise liner Spirit of Discovery.
Investors even seemed content to swallow a dividend cut, with the interim payout cut from 3p a share last year to just 1.3p.
Markets clearly expected much worse, with the group trading at a forward valuation of six times earnings. Today’s results included “good progress made in insurance and cruise,” with results in line with expectations. Full-year guidance for underlying profit before tax of between £105m and £120m remains unchanged.
Flexing their consumer muscles
The big problem Saga faces is that the over-50s are increasingly financially savvy, and prefer to shop around for the best deal on insurance and holidays rather than clinging to familiar names. Inevitably, Brexit is making them nervous and reluctant to spend, hitting its cruise and holidays businesses.
Saga responded in April with a “strategic reset” aimed at boosting customer retention across its home and motor products, including three-year price fixes. Saga has now reported good progress, with more than 175,000 three-year fixed price policies being sold since launch, while a higher proportion of customers are now coming to the company direct.
It has also fully achieved cruise revenue targets for 2019/20, with forward bookings of more than 50% of the 2020/21 target, and capacity days increasing 28% next year.
Group CEO Lance Batchelor, who steps down in January, said Spirit of Discovery is now fully operational, “delighting customers, and delivering on our targets for filling additional cruise capacity into next year.” Saga’s membership programme is also boosting cross-selling opportunities, he added.
The group still faces plenty of challenges, particularly in its tour operations division, where underlying pre-tax profit halved, from £8.4m to £4.2m. That’s a result of “fewer passengers and a high level of discounting across the industry,” although forward looking visibility suggests this won’t continue in the second half of the year.
In July, GA Chester said it wasn’t too late to buy the soaring Saga share price, but that’s slightly less true after today’s massive jump. This underlines the importance of getting in early if you really want to benefit from recovery stocks.
Saga appears to be setting the right course but still faces a long journey in choppy waters. However, a forecast yield of 8.7%, covered 1.9 times, should smooth your passage.
Discover the name of a Top Income Share with a juicy 7% forecast dividend yield that has got our Motley Fool UK analyst champing at the bit!
Find out why he thinks “the stock’s current weakness may offer us the chance to buy a proven dividend performer at what could be a bargain price”.
Click here to claim your copy of this special report now — free of charge!
Harvey Jones has no position in any of the shares mentioned. 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.