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Why I think the Saga share price should keep climbing

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The Saga (LSE: SAGA) share price rose by 10% on Wednesday morning, taking the stock’s total gain over the last year to 65%. Investors appear to be betting on a strong comeback for the over-50s group’s travel business.

Saga’s latest financial results shows that cruise bookings for 2021-2023 are 20% higher than at the same time last year. That suggests to me the company’s core over-50s market is ready to start travelling (and spending) again.

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The group’s insurance business is ticking over nicely, and its travel operations are ready to ramp up. I think Saga’s profits — and share price — could rise steadily over the next few years.

Solid foundations

A lot of news coverage on Saga seems to focus on its travel business, especially its cruise ships. But the reality is that before the pandemic, travel accounted for just over 10% of group profits.

The majority of profit came from Saga’s insurance business, which sells products such as home, motor and travel insurance to the over-50s market.

Saga’s latest numbers suggest to me this business is still humming along nicely, despite the pandemic. Insurance generated a pre-tax profit of £135m in last year, up from £131m in 2019/20.

Management says renewal rates improved last year, with more policies solid directly to customers. That suggests to me the company is rebuilding its reputation with older customers.

Travel opportunity

Saga’s share price has now risen by 65% over the last year. I think this strong growth reflects investor excitement about the opportunities in the group’s travel business.

Customers seem to agree. Forward bookings from now until 31 January 2023 total £154m, 20% higher than at the same time last year. It’s clear Saga’s over-50s customer base wants to start travelling again.

As the UK’s vaccine policy has prioritised over-50s, it looks like they’ll be the first to be able to travel freely once more. With two new boutique-style cruise ships on its books, I think Saga’s travel business could return to profit more quickly than some rivals.

Saga share price: what I’d do

Of course, this situation isn’t without risk. Saga’s strong share price performance means that some recovery is already priced into the stock, which trades on 14 times 2021/22 forecast earnings.

The group also has a fair chunk of debt. Net borrowings were £760m at the end of January. Although the firm has agreed payment holidays relating to its cruise ship loans, these are due to end in March 2022. If Saga isn’t able to operate its ships at full capacity by then, I think there’s a risk cash flow will come under pressure.

In a worst-case scenario, I think Saga could face another cash crunch and require further funding. My personal view is that this is unlikely, given the apparent success of the UK’s vaccine programme.

I expect to see a strong recovery in profits next year, as travel returns to normal. For this reason, I think Saga’s share price could have further to rise.

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Roland Head 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.

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