Whatever happens, there will always be winners….
Continuing our posts talking about who is well placed to benefit from a post-Covid world, today I’d like to tell you about why my holding in Saga, the over 50s travel and insurance group, may have good prospects:
Date: January 13, 2021
Saga is a UK listed small-cap focused on the needs of its over 50s customer base. As such, it is a less obvious vaccine beneficiary and better placed than virtually any other travel company to see an early upturn in business.
Saga plc is a provider of a range of travel and insurance services for its age 50 and over customers. It has 2.7 million customers and three key divisions. Saga Holidays provides package holidays and tours across the globe. It owns and operates the cruise ships MS Saga Pearl and MS Saga Sapphire and also owns and operates the Bel Jou Hotel in St Lucia, as well as Titan Travel. Saga Services provides a wide range of Insurance products and legal services. Saga Personal Finance provides savings accounts, credit cards, travel money, financial advice, equity release, share dealing, annuities, life assurance & long-term care funding advice.
Past performance is not a true indicator of future results.
There are a number of catalysts to higher earnings and value creation. Once its 2 brand new cruise ships set sail again, they’re forecast to generate £40m p.a. EBITDA each. Plus the resumption of its travel agency business, on top of the profits already being made by its insurance division (everyone hates the insurance sector so it’s at rock bottom valuations despite being profitable), means that earnings have plenty of near-term upgrade potential. The current market value is in my opinion far too low at 7x earnings as forecasts show a tripling of earnings in the coming year (consensus forecasts are for earnings of 1.9p a share for the year to January 2021, rising to 5.3p in FY2022). In a best-case scenario, I see a potential 5-bagger over the medium term.
In terms of rolling out the vaccine, it now looks inevitable that governments will have a priority order based on age / clinical risk stratification (this strategy is explained by the UK government’s own website). Therefore this vaccine rollout strategy could be a double catalyst for Saga as I imagine the majority of their travelling customers will fall under some of the first priority groups to be vaccinated. Obviously, this will take a lot of time to work through the system, but it looks like their share price could re-rate quicker than some sectors aimed at a resumption of spending and going out by younger people i.e. nightclubs/bars/restaurants etc.
Past performance is not a true indicator of future results.
The speed of the recovery to normal trading in the travel industry is of course highly uncertain. If the disruption turns out to be short-lived, the group will have suffered a severe wound but will probably eventually return to historic profitability levels. Shareholders could be rewarded for weathering the current storm. Mercifully, COVID-19 isn’t having any real impact on the insurance divisions, which is a key source of cash at the moment. In terms of long term growth prospects, however, personal insurance is a tough market to be in, and increased price transparency and ease of switching has made it increasingly difficult to stand out. Analysts have worried for some time that Saga’s brand doesn’t resonate with the younger end of its ‘over 50s’ customer base. Overall, in my opinion, an investment in Saga hinges on the length of the travel disruption.
Another strand of my buy case is a significant new investment by insiders. There’s nothing like increased “skin in the game” by management, founders or other insiders to indicate where there’s value. And in a market like this where there’s so much in flux, it’s a particularly useful signal. At Saga, former CEO Sir Roger de Hahn (the founder’s son) personally took up £100m out of the recent £150m equity placing. He is also returning as non-exec chairman to oversee the turnaround.
More recently, there was an important announcement that Saga cruise ships had been awarded industry-leading accreditation. This is quite an important announcement, because worries about Covid, and cruise ships, are key to the valuation of Saga. This accreditation follows extensive work by Saga to make its ships Covid safe. Remember it’s not just Covid. Other outbreaks of viruses are quite common on cruise ships. Floating Petri dishes, as they are sometimes described! The fact that Saga’s 2 ships are brand new designs - e.g. all cabins have balconies, and fresh air ventilation systems (not recirculated air) are key advantages. Demand for cruising is not the problem - customers are itching to get going again, and forward bookings are high. It’s just a question of when they will be allowed to sail. Saga’s website says they’re looking at April to May 2021 to restart, which ties in well with what the Government and other companies are saying - i.e. there should have been good progress in vaccinating the elderly by then, we hope. This news is also clearly a significant marketing opportunity, to trumpet that Saga’s ships are best in class for health & safety.
Another important marketing advantage that Saga has, is that it’s changing over to putting customer funds in a completely segregated account, i.e. there is no risk to customer deposits in the case of insolvency. Therefore Saga is also in a position to give cash refunds immediately to any customer that wants them - key for reputation & customer service. Given how problems are emerging with customers struggling to get refunds from some other travel companies & airlines (e.g. being pressured into accepting a credit note instead of cash), then I see this as being a key advantage that Saga can capitalise on. A slightly stuffy image could be a big plus, when other sector companies may be struggling with solvency.
Over 65% of customers have kept their bookings, so demand is clearly there. When it’s safe to cruise again, I reckon these ships will be full, and margins are likely to be very good. I see Saga as a nice way to profit from that pent-up demand, without the huge risks of the big cruise operators, that are on (expensive) debt-fuelled life support. What I like about this, is that investors don’t have to worry about Saga going bust anytime soon thanks to the profitable insurance arm. Whereas if we invest in a pure-play cruise line or airline etc, then insolvency is a serious threat. Plus with airlines, the lucrative business travel market might have been permanently damaged, because people are now working around long haul business trips, using Zoom, Teams, etc. instead.
Interim results - were in line with expectations. I don’t intend to dwell on these numbers, as this share is all about the turnaround. A few key numbers: Underlying H1 profit of £15.9m, down 70% on LY, Travel division is expected to burn cash of £6-8m per month in H2. That’s an important disclosure, and I see that as a manageable level of losses for now. The breakdown of the £15.9m underlying profit (see table) demonstrates that the profitable insurance division is nicely supporting the losses in travel. It doesn’t take a genius to work out that when travel returns to profitability, there should be a strong profit recovery. Remember these were only half-year numbers.
Although Saga’s high debt is a worry (reported adjusted Net debt of £410.7m, not including the recent capital raise or the cruise ships), £150m of fresh equity considerably de-risks it. The turnaround potential here looks exciting and the best-case scenario gives huge upside. Saga has a very successful insurance business (mostly motor and home), plus a travel division (including a small cruise ships operation). Obviously, that’s struggling, but I see this as a nice way to play the (hopefully imminent) Covid recovery in 2021. The combination of a highly profitable insurance business, and a travel business that should recover in due course, looks enticing. This could be a 5 bagger if the turnaround works and the strong brand is further developed. The brand has considerable untapped potential, and is very valuable, in my opinion. If it can become a trusted one-stop-shop for the over-50s, then all sorts of new products could be introduced.
Source: Company’s result presentation
Saga is at a riskier point than I normally choose to invest in because we haven’t seen the beginnings of a pick-up in travel
Saga has a huge debt pile (somewhat de-risked by the £150m equity raise)
Saga is a turnaround play and therefore subject to significant execution risk. It was a solid business weakened by its decade of private equity ownership. “Debt increased dramatically and decision making became too focused on the short-term,” the CEO commented. But investors still have no clear sense how loyal their customer base has remained. Half-year numbers – marked by a 57 per cent drop in non-insurance revenue – spell out the damage
The Covid disruption could continue, or high-profile coronavirus outbreaks on cruise ships may have permanently reduced demand
Exposure to the travel sector is clearly another major negative at the moment, with the fixed costs of its cruise ships being a cash drain until cruising can resume in hopefully in Q2
Disclaimer: This information does not constitute any form of advice or recommendation by Pynk One Ltd. and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision.
When investing, your capital is at risk and you may recover less than the initial investment.