UK Edition
Questor: stay on board Saga as its membership scheme deepens its bond with clients
Sometimes no news can be good news and last month’s trading update from Saga, the insurer-to-travel company for the over-50s, provided some welcome reassurance after a profit warning in December and a share price plunge that left this column with an awkward book loss on its tip from April last year.
Trading met expectations for the first four months of the financial year to January 2019 as Lance Batchelor, the chief executive, reported healthy momentum across both the insurance and travel operations.
Shareholders can draw further comfort from the fact that 740,000 customers have now signed up for Saga’s “Possibilities” membership scheme, up from 500,000 in April.
A fifth of the firm’s customer base provides four fifths of its profits. You could take that as a good or a bad thing, but this column leans towards the former view. The Possibilities scheme could help to drive revenues, profits and cash flow as Saga looks to deepen its relationship with existing customers and win new ones.
It seems that Batchelor and his colleagues have spent a lot of time researching this particular segment of the company’s customer base, so they can work out why they are so loyal, how Saga can sell further products and services, and identify other customers who show similar traits and patterns.
The Possibilities scheme is part of this broader drive to engage more effectively with the company’s customers.
This is not to say that Saga is sailing in calmer waters just yet, and risks remain: the stock would not be trading on a forward price-to-earnings ratio of less than 10 with a forward yield of more than 7pc otherwise. The good news is that the £100m dividend looks affordable.
Take operating profit of around £180m, add £40m of depreciation and amortisation, take off tax of £32m, interest of £3m and unchanged capital investment of £80m and you are left with enough to fund that dividend – provided that there is no further deterioration in trading. That remains the key risk to income seekers.
Reassurance on the dividend and the prospective yield should help to underpin the shares.
Questor says: hold
Ticker: SAGA
Share price at close: 126.4p
Update: Manx Telecom
They say a picture is worth a thousand words and the same can apply to stock market price charts. Even if this column focuses on company fundamentals (“value”) rather than technical analysis (“price”), it still keeps an eye on the charts.
The market cannot always be right but its views must always be respected – and in the case of Manx Telecom, the picture painted by the chart is a rather ugly one.
The chart slants from top left to bottom right and the stock refuses to break above its 200-day moving average. This looks spookily reminiscent of other Questor yield plays that have gone wrong, notably Centrica and Connect (and perhaps even Saga as above).
Manx’s forward yield of 6.7pc will tempt income seekers. The theory is that while earnings cover and free cash flow cover for the divi are lower than ideal, both should improve as the benefits of investment and cost savings come through. But the full-year results were a bit mixed and growth investors may be better off looking elsewhere. Time to put the phone down on Manx.
Questor says: sell
Ticker: MANX
Share price at close: 175.5p
- Read Questor’s rules of investment before you follow our tips. See Questor's tips every day at twitter.com/DTquestor
Update: Avesoro Resources
Our analysis of Avesoro Resources, the west African gold miner, is off to a decent start, with a 29pc increase in the mineral reserve estimate for the Youga mine in Burkina Faso.
Less directly, new powers for the Bank of England that would allow it to pump £750bn into the economy without government permission would intrigue gold bugs who see the endgame as further economic gloom and more central bank money creation.
This is a speculative punt on gold and thus a hedge on markets turning sour.
Questor says: hold
Ticker: ASO
Share price at close: 262.5p
- Questor archive: telegraph.co.uk/questor
Russ Mould is investment director at AJ Bell, the stockbroker