One of the ghastlier aspects of the pandemic has been the public’s adoption of state-sanctioned newspeak. We’ve followed the rule of six, while staying alert and eating-out-to-help-out, but we should have smelled a rat when it became obvious that the initial 15-day target to flatten the curve had clearly been made in hope rather than expectation.
Ministers have been trying to balance the clinical imperative for lockdown with the widespread economic damage that would ensue due to widespread business curtailment. Indeed, it is probably still too early to determine the efficacy of government policy as the crisis unfolded, particularly regarding the economy.
Thankfully, financial markets tend not to equivocate on such matters. So, after a sharp initial sell-off, exacerbated by stop-loss orders and a 20 per cent rise in margin calls, we were treated to the shortest bear market in history as investors flooded back into risk assets. Admittedly, there are reduced options for investors with bond yields in negative territory when adjusted for inflation.
The bounce was triggered by news of the US Federal Reserve’s Primary and Secondary Market Corporate Credit Facilities – sure signs that Washington was prioritising market liquidity. Government intervention had underpinned the longest bull run in history, so why not again? The rapid retracement in index valuations didn’t represent a vote of confidence in the real economy, at least in its entirety; certain industries, such as virtual healthcare, home entertainment, e-learning, logistics and pharmaceuticals have boomed during lockdown.
At any rate, some companies and/or sectors have been more exposed to the negative impact of lockdown than others. Early in the pandemic, we wondered if an outfit such as Saga (SAGA) – a provider of insurance and travel services (including cruiselines) for the over-50s – would be able to see out a prolonged disruption to normal trading activity. The scope of the business offering, though not unique, exposed the group badly on one front, but under the circumstances its target demographic was another concern.
And matters played out rather rapidly. At the end of January, Saga highlighted a “resilient picture in those parts of the business where [the] customer proposition is truly differentiated, notably in escorted tours”. By midway through March, Saga had decided to suspend operations of its cruiseline, and within a fortnight it had canned its annual dividend and reorganised its loan covenants.
Full-year figures for 31 January make for grim reading, although restated impairments for the prior year resulted in a reduced net earnings loss. Sales costs from the travel segment fell from £365m to £68.1m and given that reported profits from travel were only just in positive territory through FY2020, the hit to group profitability was not as pronounced as it might have been – cold comfort indeed.
At a multiple of 2.7, the group’s net debt remains well within its loan covenant multiple of 4.75, although this figure does not include the £245m borrowed to fund the purchase of the Spirit of Discovery. This latest maritime loan is a predictably long-dated affair, but at the group's current rate of cash-burn of £6m-£8m a month, it will either need to borrow further, or raise funds, at some point during the second half of 2021.
However, the central question for investors is the extent to which over-50s holidaymakers will return to the high seas in the wake of Covid-19? The early signs are encouraging, with the group reporting total cruise bookings up by a fifth on the prior year, but even with the prospect of newly-vaccinated seniors, the sector still doesn’t inspire confidence.
