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Saga Plc Full Year Results Comment – 14 May 2015

Company Overview

Saga was initially established in 1950 as a holiday provider for the over-50s generation. Since the group launched, it has diversified the range of products offered to its clients to include insurance, health care services and media (magazine).

The group claims to be the only commercial organisation in the UK that has an exclusive focus on the growing over-50s demographic. It holds a database of 8.4 million contactable households which, management estimate, covers more than 50% of the UK over-50s demographic.

The group is owned by a consortium of private equity groups made up of Charterhouse Capital Partners LLP, CVC Capital Partners and Permira Advisers LLP. Saga is currently held alongside AA within the holding company Acromas, which was created during a 2007 buyout of the two groups.

Index FTSE 250 Ticker SAGAG.L Latest Close 209.90
52 Week High 210.00 52 Week Low 143.75 P/E (F)  15.7
Dividend Yield %  2.0 Dividend Cover  0 CEO: Lance Batchelor
CFO: Stuart Howard Previous Price Target 125.00 Current Price Target 185.00

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Saga shares reach new highs as market digests full year results update

Saga shares have recorded strong gains throughout May after management delivered a “better than expected” set of results for 2014, which included the announcement of  a full year dividend that was at the higher end of the anticipated range (4.1 pence).

The results update was followed closely by news that the group’s owner Acromas intended to sell a further stake in the insurer, a partial sale which is now believed to have raised just over £220 million for the parent, while also reducing its remaining position to just 51%.

Today we take a closer look at the results for 2014 as well as management’s plan for the year ahead, before outlining why we have raised our price target for the shares.

SAGA Plc Share Price / Daily Intervals

SAGAMAY

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On the whole, SAGA’s debut financial results were reasonably good

The big takeaways from SAGA’s full year update were undoubtedly those surrounding the dividend, a better than expected trading performance and the group’s disposal of its public sector healthcare business.

This was as management announced a 4.1 pence dividend for the period, a pay out that was at the higher end of the anticipated range, while on a less positive note it wrote down the value of its public sector healthcare business by £220.2 million.

The write-down pushed SAGA to a post tax loss of £133.8 million for the period, although if we strip out the effect of this, earnings per share would have otherwise came in at 8.6 pence for the year.

This is slightly below our own expectations for 2014 although management have pointed out that if other one-off costs, such as those taken as a result of the IPO, are also stripped out then group earnings per share would have been somewhat higher at 12.6 pence.

Judging by the reaction from the shares, this was a sufficient enough performance for investors, one that now gives us an idea of roughly where we can expect growth to begin from for the current year.  

 

Divisional performances were all quite positive in 2014, while motor insurance now looks set for a strong 2015

Most of the divisional performances were all quite strong at SAGA during 2014, with a particularly good revenue result emerging from the group’s travel operations (+15.2%). This aided a sharp increase in travel EBITDA for the period, which rose from £20.1 million to £26.0 million.

In insurance, the group remained challenged by a tough market for motor premium rates although reserves releases from prior years were fractionally higher, while the division’s combined ratio fell markedly from just over 88% in 2013 to just over 77% in 2014.

Looking ahead, the insurance division should benefit from the introduction of more underwriters to group wide platforms, as well as the launch of its first motor insurance “panel” of independent underwriters. 

Management hope that the panel of dedicated motor underwriters will enable the group to remain competitive and also maximise the earnings potential of this particular book, which more or less replicates the set-up it  has with home insurance.

In addition to the new underwriting structure, SAGA also announced the acquisition of Bennetts Motor Insurance early on in 2015. When the deal completes, it should see SAGA add another 200,000 motor insurance customers to its database, which is positive because it could potentially add as much as 6% to earnings for the year ahead.      

 

SAGA pushes on into wealth management through joint venture with Tilney BestInvest

In addition to updating investors on their plans for the group’s traditional operations, management also took the full year results announcement as an opportunity to announce that SAGA will be entering the wealth management sector in 2015.

While full details relating to the array of services it will offer are yet to be released, we do know that it will come on-line late in 2015 and that it will be in the form of a tie-up with fund investors Tilney BestInvest.

At present it is not possible to suggest the potential contribution to earnings of this division although we note, that if SAGA’s savings accounts and credit cards business is folded into it, then the group will have a base of £5 billion AUM to start from.

 

Balance sheet, dividend and valuation

2014 was a positive but volatile year for SAGA’s balance sheet, one in which the group saw borrowings increase by £1.4 billion shortly before its IPO, only for them to fall back to £711 million shortly after.

At the present time, debt to equity sits at 0.7X and total gearing at 41%., which is not unreasonable at all; particularly when considering that management have pledged to continue working to reduce balance sheet leverage.

In terms of the dividend, the board announced a 4.1 pence payout for 2014, which provides the shares with a current yield of 2%.  Although this payment was not covered at all by EPS, given the impairment driven full year loss, if a constant rate of earnings is achieved for 2015 then SAGA should easily be able to achieve dividend cover of 2.0X for any subsequent capital returns.

From a valuation perspective, we continue to see SAGA as top heavy although the distance by which the group is overvalued has narrowed slightly since the release of 2014 results. This is partly the result of a broad upturn across the motor insurance sector during recent months, as well as an improved outlook for SAGA itself.

At present the group trades on a forward earnings multiple of 15.7 X consensus estimates for EPS in 2015 (13.3 pence), which is moderately above the 14.2X sector average, but less so than at the time of our last update.

Despite a clearer outlook for earnings at SAGA we remain uncomfortable with its premium valuation because when it comes to motor insurers, there is better value out there in the London market. This is while the group’s efforts at diversification through entering into wealth management will not be without added complexity or risk, which could eventually become a weight around the ankles of the shares.

 

The takeaway

With the full year loss set aside, SAGA’s adjusted earnings performance in 2014 was moderately ahead of expectations.

This is while management’s steps to reduce balance sheet leverage have resulted in both lower gearing and lower net debt/EBITDA, which is positive for the group’s overall financial position as well as for the risk profile attached to the shares.

Looking ahead, SAGA’s push deeper into the motor insurance space with the acquisition of Bennett’s will most likely prove a net positive for earnings in subsequent periods, which is also valuation positive.

This is while the group’s proposed move into wealth management later in 2015 may also provide another platform for growth. However, this is not without risks, despite that management have gone some way toward mitigating these by opting for a joint venture with Tilney BestInvest instead of going it alone.

On balance, we have shifted from a bearish stance to a more neutral position in our future outlook for SAGA shares. In doing so, we have considered a recent shift higher in terms of valuations across the motor insurance space and the full year pro-forma performance in terms of EPS at the group itself, as well as consensus expectations for growth in the low double digits during 2015.

Consequently, we raise our price target today from 125.00 pence to 185.00 pence per share, which implies an earnings multiple of 14.2X consensus estimates for EPS in 2015. Although this revised target is a considerable distance above its earlier level, we caution that it still implies downside of roughly 10% from current prices over the near to medium term.

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