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Saga Plc Half Year Update – 08 October 2014

 

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 161.25
52 Week High 188.00 52 Week Low 159.00 P/E 15.7
Dividend Yield % -TBC- Dividend Cover CEO: Lance Batchelor
CFO: Stuart Howard Price Target 125.00

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Strong Underwriting Performance Drives H1 Growth at Saga; Market Re-Rates the Shares   

After initiating coverage of Saga Plc at the point of its IPO, the newly-listed shares have spent much of their time struggling to remain afloat as geopolitical risks depressed markets and investors remained largely unconvinced of the company’s ability to justify its valuation.

A rounded summary of our perspective on Saga at the time of the offering was that the new shares were best avoided at all costs, given the mis-categorisation of the company as a consumer goods retailer as opposed to the insurance-driven business that it actually is.

Our view holds that this enabled the private equity owners to make a partial exit at an inflated price as part of a bigger move which is likely designed to ensure a total exit over the longer-term where the aggregated price of each listing is above fair value.

Since this time share price depreciation, H1 earnings growth and an uptick in valuations across the motor insurance industry have each served to partially close the gap between the earnings multiple (valuation) of Saga Plc and those of its competitors.   

Today we provide a bullet pointed overview of the newly listed company’s first half financial performance before looking once again at the future prospects of the shares.

Saga Plc Share Price // 8 Hour Intervals

SAGAOCTOBER

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Half Year Results and Highlights

  • Share price has fallen 13.5% after premium pricing of IPO, thus reducing the valuation attached to the shares from 18.5 X 2013/14 earnings, down to 15.7 X.
  • Group revenue down 3.9%, largely as a result of lower premium rates in motor insurance and despite strong growth in Travel business.
  • Considerable jump in earning per share for H1 (19.7%), driven by a stronger underwriting performance and a more benign claims environment.
  • Customer growth has been non-existent despite anticipations of a positive impact from the publicity generated by the IPO. Customer numbers and total products held per customer are both largely flat with the year before.
  • Management anticipate another positive performance in the second half.


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Our View: Why We Are Still Not Feeling Saga Plc

It is encouraging to observe that the market has begun to re-rate the shares in accordance with the valuations of other insurers. This provides the opportunity for them to stabilise at sustainable levels while eliminating a degree of the downside risk that had previously been attached to them.

Despite this, the valuation on a historical price to earnings basis remains expensive relative to that of the group’s peers (15.5 X 2013/14). In order for the valuation to converge with the average of its competitors, Saga would need to replicate its H1 performance again in the second half to achieve 14.6 pence EPS and a valuation of 11.4 X earnings.  

Our view is that this is unlikely. On the contrary, we expect insurance claims will be higher during the second half, thus reducing underwriting profitability, while revenues from travel holidays are also likely to be lower due to the Christmas period and the seasonal nature of the holiday travel industry. This is likely to result in lower earnings during the period relative to those of the first half.

In calculating our own projection of full-year performance we take into account the above assumptions, before looking at the numbers provided by Saga for H1 EPS in 2013/14 and our own calculations for full-year numbers (not provided by Saga) in the same year.

This assessment appears to confirm our suspicion in that 60% of Saga’s full year earnings were likely to have been accrued during the first half of the year. As a result, we project that EPS for the full year 2014/15 will be equivalent to 10.89 pence per share, which represents an increase of 6.7% on our own calculations of EPS last year.

Such growth is barely on par with that demonstrated by more focused insurance names, with established reputations for delivering growth as listed companies. Here we refer to the likes of Admiral Group Plc and Hiscox Ltd to name just a couple. Our conclusion from this is that Saga Plc’s financial performance in no way justifies a premium valuation.

Going further and in addition to the above, our earnings projections imply a share price of 124.14 pence at the current sector average. This represents a substantial discount to the current market price of 160.00 pence and leaves us with nil incentive or inclination to alter our negative outlook for the shares.

Consequently, and out of the belief that the overall risk for Saga investors remains toward the downside, we reiterate our pre-IPO statement that the shares would be fairly valued at or around the 120.00 pence level.

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IMPORTANT:
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