The Saga [SAGA] share price has dipped on the back of the 12-month update.
The group expects full-year underlying profit before tax to be £110 million, which would be in line with the forecast of £105-£120 million. They confirmed that the insurance division has been largely unaffected by the coronavirus health emergency, and that unit is assisting with cash flow and profitability for the entire group. Saga has also confirmed that they have a strong liquidity position. It has already drawn down £50 million from a credit facility, and has £92 million in cash. In this climate, cost cutting is common place, and Saga have earmarked £15 million for its cost reduction plan. The dividend has been halted too.
The impact of the cruise division suspension
The company's cruise division has been suspended for roughly two weeks now, and that suspension is currently set to last will last until early May, but Saga has run a scenario whereby the division is suspended for six months. In January, bookings for next year stood at 80% of their target (ahead of expectations) but, understandably, there is a lot of uncertainty looming over the cruise business now and this is reflected in the Saga share price this morning.
Putting the Covid-19 situation to one side, the changes the company has made in relation to the insurance business are showing signs of improvement. It sold 320,000 three-year fixed price polices, and the bulk of that was done on a direct sales basis. The three-year contracts will provide some certainty in terms of business, in very uncertain times.
The group has taken the advice of the FCA and so will delay the publication of its audited full-year results until 9 April 2020.
The Saga share price and Covid-19
The Saga share price has taken a battering recently, amid the Covid-19 chaos. In mid-March the company took the tough decision to suspend all its cruises until 1 May, and with the way things are going in terms of lockdowns, the firm might have to push back the date to resume service even further. Carnival, the cruise operator, is in a similar position. In fact, the entire travel sector is in limbo on account of the health crisis.
Year-to-date, the Saga share price is down approximately 80%. But it is worth noting that the company was already finding trading tough before the pandemic struck. In September, the group posted poor first-half numbers. Profit for the six-month period dropped 52% to £53 million. The travel unit saw earnings plunge by over 90%, while the insurance side of the business registered a 35% fall in profit to £71 million.
Saga's insurance division
Prior to coronavirus, the company had to change its strategy in the insurance unit as it made the mistake of offering relatively cheap products in the hope of obtaining repeat business, but the rise of price comparison sites has made the industry more competitive. The firm has shifted away from promotional offers, as a price war often only benefits the client, at the expense of the shareholder.
Elliott management, the activist investor, owns a 5% stake in Saga. A few months ago there was talk of the group being broken up into two separate units – insurance and travel. Given the current market conditions, the break-up talks could be put on hold as stock market sentiment is likely to be weak for a while.
The Saga share price has dropped by more than 90% since the company floated on the stock market in 2014. Given the almighty demand shock due to the health emergency, the group is likely to struggle in the medium-term.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.