Saga still struggling with pandemic ill-effects

Given Saga’s (SAGA) business mix, few companies could have been worse placed to ride out the pandemic. Indeed, one of the first areas to feel the negative impact of Covid-19 was the cruise industry. At risk of sounding callous, it probably didn’t help matters that Saga’s target demographic, the over-50s, found themselves disproportionately in the crosshairs of the virus.

By now, the market probably expects that any positive news on the group will come in increments, so the shares duly clicked into reverse on results day, despite predictable assurances over turnaround strategies and debt reduction.

Saga registered a double-digit increase in revenue even though net premiums were broadly in line with the FY 2021 comparator. However, it was accompanied by an 8.3 percentage point reduction in the gross margin, a somewhat crude, though arguably indicative, measure of performance. The statutory loss did narrow, though this was entirely due to £65m in impairments taken on in the prior year.

Financial comparisons probably aren’t as meaningful as you might expect given that various parts of the business are still coping with the legacy effects of the pandemic. The group had to contend with higher marketing costs as business groaned back into life, along with increased motor insurance claims as traffic volumes returned to more normal levels. It would be reasonable to assume that underwriting general insurance policies must be a more challenging process given that many end-markets remain in a state of flux, though the number of policies in force increased for the first time in nearly a decade, while the segment generated underlying profits of £54.1m, albeit with £42.1m in prior year reserve releases.

Attention is likely to focus on the performance of the cruise/travel business through the remainder of this year. The tour operations business is targeting a return to pre-pandemic contribution levels from 2023/24, helped along by a planned reduction in the cost base through restructuring initiatives. The recent travails of P&O Ferries may have spooked some shareholders, though any comparisons would be somewhat spurious. The fact remains, however, that we can’t be sure how quickly load factors for Saga’s liners are likely to recover to pre-pandemic levels, if at all. It’s entirely possible that some over-50s no longer relish the prospect of living cheek-by-jowl alongside potentially virulent fellow mariners.

Management gave few specifics on near-term financial performance, and it is too early to determine if restructuring measures have made the group any more watertight, even though it recorded a 4 per cent fall in net debt. We will need to wait longer to determine whether it is dealing effectively with the legacy issues of the pandemic. Hold.  

Last IC View: Hold, 293p, 27 Jan 2022