City analysts have been optimistic about the potential for Saga’s (LSE: SAGA) business to recover. They’d pencilled in a generous three-figure-percentage rebound in earnings for the next trading year to January 2022. But today, the travel and insurance provider released a trading update and the share price dipped lower.
Saga has insurance operations that are ticking over nicely and a travel business that has been suspended because of Covid-19. The company said today the retail insurance broking business performed well in the six-month period from 1 August 2020. And that applied to all the categories of Motor, Home and Private medical insurance. Meanwhile, in a rare positive delivered by the pandemic, there were “significantly” fewer motor claims because customers haven’t been using their vehicles as much as usual. So for those reasons, I can see why the share price had risen across the first three weeks of January.
Saga’s cash-burn
The firm has been focusing on customer retention and controlling costs in the travel business. But the business has been burning more than £6m of cash each month through the second half of the current trading year. That’s a horrendous outflow and contributed to net debt rising by £139m since 31 July 2020 to £785m. And that’s despite the company raising extra capital last September.
However, as well as burning cash, Saga took delivery of a new cruise ship in the period and that pushed the net debt figure much higher. So, the pandemic wasn’t entirely responsible for the firm’s escalating borrowings. Nevertheless, high debts are one of the big problems with the company, as I see it. And it’s one of the main items I’d monitor if I were tempted to buy some of the shares.
Looking ahead, Saga is determined to pursue its recovery strategy. And that includes aiming to strengthen the brand, improve the focus on customers and getting the insurance and travel businesses back to sustainable growth. The pandemic is ongoing, of course, but the directors “remain confident” they can “unlock the potential” of Saga.
The valuation
Meanwhile, with the share price near 267p, the valuation looks well up with events to me. And that’s even after accounting for the anticipated surge in profits in the next trading year. Although the forward-looking price-to-earnings rating is in single-digits, factoring in the big debt load produces a higher multiple. Although Saga does have a low-looking price-to-book ratio because of the cruise ships it owns.
However, to me, the valuation already accounts for a lot going right for the overall business in the future, such as earnings growth, stronger cash inflow and debt-reduction. So, I reckon the Covid-recovery trade in the stock has probably already happened. And investors will likely now be looking to invest in Saga for the longer-term growth potential of the business.
But I believe there are better opportunities available on the London stock market right now. So, I’m not prepared to risk my hard-earned on Saga shares for the time being, although I wish the company, its shareholders and the well-loved brands well for the future.