Shareholders in Saga (LSE: SAGA) have had a rough ride over the past couple of years. It had already warned on profits in 2019, even before its travel business was hit by pandemic. The travel and insurance group focusses on a target market of older customers. They are often well-heeled, so the business model of specialising in this group and gaining their loyalty makes sense.
The Saga share price has doubled since October. But can it now double again and reach 500p in 2021?
The case for Saga
The basic business model of the company is one of its attractive features. Older people who have saved money for decades are a good target market for high-end travel as well as insurance products. By focusing on them, Saga is able to build its reputation among such customers. It can understand their needs better and so respond well to them.
For many decades the model worked well. However, over the past couple of years the company stuttered. The pandemic impacted its travel business heavily. However, the resilient insurance business provides some counterbalance. Last week the company reported that even with the pandemic headwinds, it expects to report a full-year underlying profit before tax.
Given the current Saga share price, that will likely tempt some bargain hunters to bet on a price appreciation.
I won’t touch Saga yet
By contrast, I have no plans to buy Saga shares for the foreseeable future. The shape and size of its recovery just remains too unclear. I also think the pandemic has shown up a weakness in its business model – the reliance on persuading shiploads of older people to travel together. That worked well before the pandemic, but the world has changed. It remains to be seen how long it will be before demand for cruises among more vulnerable holidaymakers returns. It bought two ships over the past couple of years, so the longer the older cruise market is weak, the more Saga will suffer.
The company has said it does not plan to pay dividends for the next few years. Based on its goal of reducing leverage, I don’t expect any dividends until 2024 at the earliest. That damages the investment case for the company. That is one reason I think share price recovery will be slower than it otherwise might.
The Sage share price isn’t just about demand recovery
Meanwhile, although the company is in compliance with its banking covenants, its balance sheet remains weighed down by debt. So any recovery in the travel business won’t necessarily be reflected in short-term value creation for shareholders. The Saga share price has been damaged by weak performance, but it won’t necessarily jump up just because business performance improves.
To get to 500p, I expect the company would need to show rapid recovery in its travel business, as well as continued strength in insurance. Even then I think it would be a rich valuation. I don’t expect cruise demand among older travellers to recover quickly, although widespread vaccination could help bring back demand sooner than I expect. I do not therefore see clear drivers to push the share price to 500p this year. That is why I won’t be buying Saga shares any time soon.