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 Saga Plc Pre Results Update – 08 April 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 185.00
52 Week High 195.00 52 Week Low 143.75 P/E (H) 17.6
Dividend Yield % -TBC- Dividend Cover N/A CEO: Lance Batchelor
CFO: Stuart Howard Previous Price Target 125.00 Current Price Target 125.00

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A sharp recovery from Saga shares in the new year could be premature

Saga shares have spent much of their time since IPO struggling remain afloat as investor’s doubts over the group’s ability to justify its valuation grew.

A key milestone in Saga’s life as a listed company was the lockup expiry in November which meant that managers and institutional investors who were granted shares in the IPO would then be able to sell down their holdings.

It was the passing of this milestone and the relatively mild sell off that laid the foundations for a sharp bounce in the shares during January, one which which has now brought them back to par with their IPO price.

However, with the release of the group’s full year results just around the corner we believe that the recent rally in the shares may soon prove to have been a slight bit premature. It is with this in mind that we revisit our initial outlook for the shares, before updating

Saga Plc Share Price / 8 Hour Intervals

SAGAEASTER

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Updating our outlook for Saga Plc ahead of full year results

At the time of our last update we wrote about how the group would need to replicate its performance in  the first half in order to achieve just 14.0 pence earnings per share for the full year.  

We also drew attention in our earlier coverage to the proportion of earnings that was generated by the group’s insurance operation relative to that produced by travel and health care, which we later cited as the pretext for our choosing to value Saga as an insurance firm and not as a consumer goods company.

Since then, little has changed to alter our view that the group should be valued on par with other insurance businesses. Moreover, we note that group has recently concentrated its exposure to insurance when it announced that it will substantially reduce the scale of its healthcare business by selling off the public sector arm of Allied Health Care.

While the above move is designed to avoid the diminishing margins available through the provision of state care, it will have the obvious consequence of increasing Saga’s reliance upon the insurance and travel divisions of the group.

In addition to the above, we also note the group’s January announcement that it has agreed to acquire the Bennetts motor insurance business from BGL Group for a total consideration of £26.26 million. This further concentrates SAGA’s exposure to insurance and will not help to discourage doubters from criticism.

As a result we reassert our conviction that SAGA remains an insurance business, which is a view that is supported by the above developments, in addition to the fact that almost all of group earnings will derived from the insurance division for the foreseeable future.

 

Everything hangs on the 2014 earnings performance for SAGA shares

Looking ahead SAGA investor’s fortunes for the immediate future will be dictated entirely by the group’s earnings performance for 2014.

At present the group still trades on a premium to its peer group on a historical price to earnings basis, while on a forward earnings basis, the current share price combined with our own projection for EPS in 2014 also suggests that a premium exists.

However, it is possible that we have been overly bearish on the earnings potential of the group and in the absence of a reliable consensus, the possibility that SAGA surprises on the upside at the end of this month cannot be completely ruled out.  

From the information that has come in with full year numbers for other motor insurers it appears that the claims environment has once again, remained benign throughout the year.

This should be a positive for earnings at SAGA, although we note that despite this, EPS figures still fell at two out of three of the UK’s largest motor insurers during the year.

As a result, we draw no binding conclusions when it comes to the likely performance of the group during the recent year.

 

The takeaway

It is not possible to say exactly what full year earnings numbers will look like for SAGA, but only to make a best effort guess.

In deriving our earlier projection for EPS we took account of both past trends in earnings and growth across the group, as well as consensus projections for EPS across the wider motor insurance industry.

This led us to assume that around 60% of full year group earnings would be loaded onto the front end of the year, with the remainder being accrued in H”, which suggests that EPS in 2014 should be somewhere between 10.0 & 11.0 pence.

Taking into account this view, as well as the group’s 2013 performance, we are able to derive both forward and historical earnings multiples for SAGA, which are 17.0X and 17.6X respectively.

Each of these multiples places SAGA at a premium valuation to both the non-life insurance sector as a whole, as well as the motor insurance industry as a standalone.

As a result of this we see no reason to update our fair value estimate for the shares ahead of the publication date for 2014 full year results. However, we shall revisit SAGA once again after the announcement and update, or reaffirm, our outlook accordingly.

(Full year financial numbers will be released on Thursday 30 April 2015.)

 


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