They say profit warnings come in threes, so investors in FTSE 250 stock Saga (SAGA) will be especially anxious as the firm announced its second in the space of just 16 months on Thursday.
Shares in the insurance and holidays provider for over 50s fell as much as 40% to as low as 65p after it announced a pre-tax loss, dividend cut and shift in strategy.
The news tops off a disappointing five-year run as a listed company, during which time the shares have sunk two-thirds from their 185p offer price.
Preliminary results for the year to January 31 saw a loss before tax of £134.6 million, down from a profit of £180.9 million the previous year. That was thanks to a £310 million write-down on the value of its insurance business.
Meanwhile, the full-year dividend more than halved, to just 4p per share and the expected future pay-out ratio will be 50%.
The firm will also fundamentally change its strategy in order to “address long-term challenges”. This includes a “re-focus on its heritage as a direct-to-consumer brand with membership at its core” and provide “differentiated products and services that customers can’t get elsewhere”.
It will launch a new approach to its insurance business including a three-year fixed price proposition, an acceleration of the transformation of its tour operations and continuation of the transformation of its cruise business.
Underlying pre-tax profit for 2020 is expected to be between £105 million and £120 million, well below previous sellside analysts’ estimates of £180 million, as gross margins in its broking business are expected to decline from £80 per policy to between £74 to £71.
Chief executive Lance Batchelor said the commoditisation of Saga’s markets, particularly insurance, have made for a tough past few years for the group. “The fundamental changes we are making are essential to address the long-term challenges facing our business,” says Batchelor.
“They will support future growth in customers and profits and generate attractive cash flows for Saga.”
Investor and Analyst Reaction
“Saga is proof positive that when an investment looks too good to be true it probably is,” says Tom Stevenson, investment director at Fidelity Personal Investing. According to Stevenson, and others, the hitherto huge dividend yield of around 8% should have been a warning in itself.
Elsewhere, Helal Miah, investment research analyst at The Share Centre, says investors should have been worried over margins after its last update where management indicated a focus on volumes within the travel and cruise market. Indeed, the headwinds in this sector have been obvious for a while, with the likes of Carnival (CCL), TUI (TUI) and easyJet (EZJ) also struggling.
With more than a million members and a trusted brand, Stevenson thinks that if it can get the shift in strategy right – and start providing customers with what they want – it can start to grow again. However, cautions Miah, “moving to a more value focus should help retain and bring in new customers, but it may do little to improve the margins”.
Broker UBS says there’s now a major concern over management execution, too. “This is now the third time Saga has clearly disappointed the market since [floating in May 2014],” bemoans analyst Jonny Urwin.
There had already been significant concern around management execution, which Urwin now expects to proliferate. As a result, his previous ‘buy’ recommendation and 150p target price on the stock have been put under review.
Which Funds Own Saga?
The revised numbers, notes Urwin, would put the stock on a price/earnings ratio of 14 times, while the dividend yield would now be 4%. Further, with the revised payout ratio, dividends are likely to be 55% lower than UBS’s ongoing expectations.
“With trading looking tough, the dividend was perhaps the last attraction the shares had left,” says Chris Beauchamp, chief market analyst at IG. As a result, the income-focused funds that hold stakes in the stock will be reviewing the investment case.
These include the likes of St James’s Place UK Income, Neptune Income and SLI UK Equity Income Unconstrained, where Saga accounts for 3.2%, 2.4% and 2.1% of their respective portfolios. Unicorn Income and Unicorn Ethical Income have recently both been adding to the stock, too.
Indeed, Miah now says Saga “should no longer be considered an income stock”. Instead, it should be viewed more as “a recovery play for investors taking the contrarian approach and willing to accept a higher level of risk”.
The fund that has the biggest position in Saga is SLI UK Equity Recovery, run by Andrew Hunt. Its position in the stock accounts for 4.2% of the portfolio. Majedie UK Focus and L&G UK Special Situations both have around 2.2% of their funds in the firm.
After its December 2017 warning, Morningstar.co.uk columnist Rodney Hobson said existing investors may as well stay in, but warned them from investing more cash at the lower valuation. Then he thought the underlying business looked reasonably sound, though he didn’t put anyone off if they decided to cut their losses.
Now, investors must put faith in a management team that has got a lot wrong in recent years. “Investors must hope that after a disastrous start as a publicly quoted company the new Saga ends better than the last one,” concludes Stevenson.
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