UK Edition
Questor: Saga investors growing greyer in long wait for investment returns
Saga: 212.2p
Questor says Sell
Three years after making their stock market debut, shares in Saga have accelerated with all the pace of a Stannah stairlift. So much for chasing the grey pound. Investors who bought into the heavily-promoted sale at 185p a time are growing grey(er) awaiting their riches.
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This week the company will try to persuade the City the best is yet to come. Alongside full-year results on Wednesday Saga is holding a capital markets day. Chief executive Lance Batchelor, a slick marketer who has built a career flogging mobile phones and takeaway pizzas, has already hinted that his masterplan involves drilling deeper into its database to boost earnings by targeting high value customers. The Saga faithful should brace themselves for a blizzard of junk mail and text messages.
Of course, this company operates in a growing market segment. As Saga writes hopefully on its website, the over-50s are the fastest growing demographic in the UK, numbering 22.8m in 2013 and forecast to rise to 29.1m in 2033. But it sells to barely one of 10 of its target audience. Those 2.7m active customers suggest there could be huge opportunity ahead. More likely, the challenge is for a brand that just does not resonate with baby boomers who feel younger than they are. Saga sells insurance and holidays but offered the carrot of expansion into other business areas. Directors salivated over grabbing a slice of the £14bn wealth management market and the £5.7bn spent every year on private home healthcare. Fast forward a couple of years and those “other” activities, including the monthly magazine, make up just 4pc of sales, or £18m in the first half.
The City’s focus is trained on what Batchelor can do with Saga’s insurance arm, which delivers most of the profits. It has been a good fit because older people drive less and have fewer accidents. Batchelor is moving the company from an underwriting to a broking model. At the half year, strong motor reserve releases boosted the bottom line, but analysts at Canaccord Genuity were disappointed by the 20pc decline in gross written premiums as the motor panel took share from the existing book. Peel Hunt tweaked its view of the shift last November, raising underwriting expectations but reducing motor panel earnings assumptions by 8pc and 13pc over the next two years. While all this is going on, Saga is trying to keep investors sweet with an improving dividend. It said a year ago it would beef up its payout, promising to distribute 50-70pc of earnings up from a previous target of 40-60pc. That is good news, given Saga has been so focused on reducing the debt left over from its years going through the private equity wringer.
I am always nervous of companies that go through a carousel of advisers. Saga has changed its pair of corporate brokers and auditor within months and is on to its third financial PR firm since flotation. Batchelor and this army of hired help would say that Saga is charting a course to a more efficient and profitable future. Trading at an undemanding 14 times this year’s forecast earnings, hopeful investors might spy an opportunity. But risks abound, and disappointment is fresh in the memory. Book a cruise by all means, but don’t buy the shares. Sell.
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