I first commented on Saga (LSE: SAGA) shares back in January. I’ve been watching the stock like a hawk since then. The share price has been rising and I think the prospects look promising.
I’d consider buying Saga shares in my portfolio and here’s why.
The results
Last week, Saga released its full-year results. At first glance, the figures look dismal. Underlying profit before tax fell to £17.1m from £109.9m in the previous year. That’s a big drop.
But I think most investors are focused on Saga’s travel business, which operates worldwide tours and cruises for the over-50s. People know by now that the travel industry was one the pandemic’s victims. I think this is already priced in to the shares.
I prefer to remember that Saga also operates an insurance business, which has held up well. In fact the company refers to this division as delivering a “resilient financial performance”.
Bright side
I’m pleased to say that the news isn’t all bad on the travel side. The results did highlight some optimism. Saga is ready to resume its tour operations and cruise businesses this year. I guess it’s waiting, like me, for further details regarding government restrictions.
It’s encouraging to see that customer demand remains strong. Saga highlighted that there has been a 20% increase in total cruise bookings so far compared to the same point last year. This shows me that not only is there customer loyalty from the over-50s demographic, but also significant pent-up travel demand.
I think it’s worth noting that the UK vaccine rollout has so far been successful. Older consumers have been prioritised, which means they’re likely to be the first group of people to get the go-ahead to travel abroad. Of course, this is just me speculating. I’ll have to wait and see what the government announces in due course.
Risks
While Saga shares have been rising recently, the stock comes with risks. My main concern is the company’s debt pile. At the end of January, Saga’s net debt position stood at £760m. But when this is compared to the company’s current market cap of £541m, it’s safe to say the company is highly leveraged.
At some point this will have to be paid off. And it doesn’t help when Saga can’t operate its travel business fully due to government restrictions. While things may be looking positive for the travel industry, Saga’s management acknowledges the “economic headwinds” ahead. Any delays in the easing of travel restrictions are likely to impact the stock.
My view on Saga shares
I’m not really worried about the debt level for now. I reckon once the travel industry opens up, Saga’s revenue and profitability will bounce back very quickly. This means that the affordability of its liabilities will improve.
For now, the company has enough liquidity. This comes after former CEO Sir Roger De Haan pumped £100m of his own money into Saga. In fact he’s now Chairman. Sir Roger certainly has skin in the game and I think he will be working hard to make his investment a success.
I reckon the worst is over for Saga shares. The over-50s often have plenty of disposable cash and the demographic is growing in size. This should work in the company’s favour in the long term. Hence I’d buy the stock.