Saga’s recovery odyssey continues

Results for cruise and insurance company Saga (SAGA), which caters for those in the autumn of their lives, were scrutinised for solid evidence that the group has started to recover from the worst of the external shocks it has had to endure over the past three years. Some green shoots were apparent, particularly in the cruise and travel division which saw revenue increase by 45 per cent during the half to £197mn, as more consumers ditched their inhibitions and decided to splash out on an affordable luxury holiday.

The core issue for Saga is that the group is fatally split between a travel division that is starting to deliver underlying profits again after a long winter – nearly £12mn in these results – and an insurance broking business that is struggling to deal with cost and claims inflation. There was little sign this time that inflation in the broking business is abating and underlying operating profits were consequently down by 35 per cent to £23.8mn. Margin pressure is expected to continue into the second half with an expected average margin per policy of £56, compared with the £72 per policy that Saga was earning in the prior year.

The main issues are in motoring insurance broking, with three-year fixed deals suffering particularly. The segment’s woes also meant that a £68mn impairment charge to acquired goodwill had to be booked, while management hopes to generate efficiency savings of £5mn-£10mn. The sale of the underwriting business has been paused in the expectation that improved market conditions will help Saga achieve a better price.  

Interpreting the performance of the insurance business is also complicated by the change to IFRS 17 accounting, as this chopped £93mn from the segment’s net assets. That aside, management’s own modelling assumes no change in the direction for the insurance business this year, but a further improvement in travel.

Numis analysts noted that there were some “useful” beats in the statement, with both the outlook for cash flow and profits coming in ahead of expectations.  This should allow Saga to deliver on its deleveraging strategy, the broker said.   

With an improved booked load factor for 2024/2025 of 49 per cent as of late September, the direction of the travel is clearly positive for Saga, particularly as it can now repay a £150mn bond due next year from its total cash resources. Numis forecasts an adjusted price/earnings ratio for 2024 of 6.7.  The company is hovering around recovery, but we wait for more evidence. Hold.

Last IC View: Hold, 121p, 4 Apr 2023