2020 wasn’t easy for cinema chain Cineworld Group (LSE: CINE) or over-50s travel and insurance group Saga (LSE: SAGA). The share prices of both companies are down by around 65% compared to 12 months ago.
I guess that both firms are hoping for a gradual return to normal during the second half of this year. If that happens, I think we could see a strong recovery in trading as consumer confidence recovers.
If I’m right, now could be a good time to buy shares in Saga and Cineworld. However, both firms carry some risk. Here’s what I’d do.
Cineworld share price: why I’m worried
There are a couple of ways of looking at this situation. One is that if Cineworld’s profits went back to 2019 levels, the shares would trade on just six times earnings. That suggests the shares could be cheap at the moment.
However, there are a couple of problems with this argument, in my opinion.
Even if cinemas reopen this year, I cannot imagine that social distancing and other Covid-19 requirements will be lifted so soon. I expect seating capacity to remain very restricted.
This leads me to the second problem. Cineworld may have enough cash to survive the current lockdown. But on a longer view, I think its $8bn net debt is unsustainable. In my view, the company is almost certain to need an equity refinancing at some point in the next 18 months. For existing shareholders, that would mean heavy dilution — many new shares would have to be issued to raise enough cash.
I may be wrong. But in my view Cineworld’s share price is already high enough. I think there’s a lot of trouble coming down the road when this business reopens.
Saga share price: a potential double bagger?
I’m more optimistic about the outlook for Saga shares. Unlike Cineworld, Saga has already refinanced its operations. Much of the £150m raised came from new chairman Sir Roger De Haan, whose family previously owned Saga.
Sir Roger was chief executive and chairman for 20 years. His willingness to invest £100m personally suggests to me that he’s confident of a turnaround. That’s a view I share.
Although the group’s insurance business has faced increased competition due to price comparison websites in recent years, the company is innovating and says that sales of Saga-branded home and motor insurance policies rose by 2.5% during the first half of last year. Renewal rates are said to have risen by 5% to 80%. That seems promising.
The other part of the group’s business is its travel offering. At the heart of this is the cruise business, which is currently suspended. However, Saga has recently taken delivery of two new boutique cruise ships. These smaller ships offer space, luxury and high standards of ventilation and hygiene.
I reckon loyal travellers will be keen to start cruising again as soon as possible. So far, 65% of cancelled customers are said to have retained their bookings, rather than requesting refunds.
The biggest risk I can see here is that the cruising restart is delayed beyond the second half of this year. I’m prepared to accept this risk. The latest broker forecasts price the stock on six times 2021/22 forecast earnings. With cash in the bank and no near-term debt worries, I think Saga shares are priced to buy.