Troubled Saga fights to turn the tide

Saga’s army of retail investors have suffered a torrid time.

The share price languishes at 16p –  meaning Saga’s market capitalisation has plunged from more than £2bn three years ago to now just £165m.

Covid has been a devastating blow, crushing revenue in cruise and holidays, and leaving the group reliant on insurance as it struggles under a mountain of debt.

It emerged this month that former Aviva chief executive Mark Wilson, partnering with Munich Re and US private equity, had 33p-a-share bid rejected.

Instead, the board will tap former chairman Roger De Haan to lead a £150m share placement.

But there are fears that even this latest capital injection might not be enough for a business weighed down with £600m debt and its vitally important cruise arm suspended amid Covid. 

So can Saga turn the tide?

Saga’s problems started well before the Covid crisis.

Firstly, the firm was undergoing significant challenges in its insurance arm.

Last year, Saga insurance – made up of a broking arm and underwriting business - was hit hard by the FCA’s crackdown on dual pricing.

Saga has a pool of older loyal customers, who are less likely to switch providers than the young and are therefore more exposed to the negative consequences of dual pricing.

It took swift action.

Long-term, Saga hopes to solve the problem through a three-year fixed premium product and a push to attract more customers direct.

But insurance results deteriorated in 2019 - retail broking underlying profit falling 14.7% to £90.2m and worse still, underwriting dropped 53% to £40.6m.

Saga had hoped to offset insurance challenges with a huge profit boost from its investment in new ships. 

A £235m loan for more ships topped up debts to £593.9m.

Then Covid struck, suspending cruises and choking off an important revenue stream. 

The concern now is that Saga will breach its banking covenants on its loans.

Saga comes out fighting 

Saga has come out on the front foot, with a bullish statement on Thursday.

Its leverage ratio, excluding cruise, was 3.6x, which the board described as being “well within” the 4.75x covenant level.

Meanwhile, the equity raise will be used to reduce leverage and headcount slashed 23% to save costs.

A data, digital, brand and customer enhancement strategy is underway, while the three-year fixed premium product is growing customers quickly.

Chief executive Euan Sutherland said: “With our strengthened financial position and a refreshed strategy, we expect to be well positioned to unlock all the potential in Saga, returning the business to sustainable growth and creating significant long-term value for all our investors.”

Concerns

However, the jury is still out over whether Saga can turn it around.

Moody’s puts probability of a debt default at B1-PD – speculative and a high credit risk.

Moody’s said Saga enjoyed a ‘strong franchise’ but kept it on negative outlook amid concerns of a virus-hit long period without travel and cruise revenue.

“Notwithstanding the positive impact of the proposed capital raise, a prolonged suspension of cruise and travel operations would cause the group’s compliance with the amended lender covenants to come under pressure as the covenant levels become more restrictive over time, and also contribute to the group’s ability to repay or refinance upcoming debt maturities becoming increasingly stretched the longer the suspension continues,” Moody’s said.

Other analysts are slightly more bullish. 

Following the equity raise, Peel Hunt recommended a ‘hold’ on stock.

“This is a surprising but sensible move that should keep the Saga group together,” said analysts at Peel Hunt.

The big question mark hanging over the business concerns when cruise and travel will return to normal, piping back vital revenues into Saga. 

Yet that that doesn’t look like happening in the near future, as we enter the winter and the government is limiting groups to just six people. 

Russ Mould investment director at AJ Bell said: “”Saga remains in a very tricky place, it has no certainty on when normal service will resume in the travel business, and it will still be saddled with debt, partly associated with its ill-timed launch of two purpose-built cruise ships.

“If Saga can steer a course through the current choppy waters one can understand why the proposition might have some merit, given demographic trends should create an increasingly large pool of prospective customers.

“However, like many businesses, Saga still doesn’t know exactly how a post-Covid future will look.”

Emilie Stevens, equity analyst at Hargreaves Lansdown, said the travel arm was ‘burning cash’ but should return to strength when customers gain confidence again.

A big positive was Saga’s growing demographic of older customers, who are wealthy, and needing to be served.

“At the moment the outlook remains very uncertain and there’s no guarantee Saga will succeed, but we’re feeling a shade more positive than we did a few weeks ago,” Stevens said.