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Saga share price halves amid insurance and travel headwinds

Saga's cruise ship division is struggling to shake off headwinds from the pandemic

The Saga [SAGA] share price has been trending lower ahead of its interim results announcement on Tuesday 27 September as its insurance and travel businesses struggle to rebound from setbacks that occurred during the coronavirus pandemic.

Shares in the over-50s specialist have fallen 49.9% year-to-date to close at 142.7p on 22 September, dramatically underperforming the FTSE 100’s decrease of 3% over the same period. Investor sentiment has been dented by Saga’s underperforming businesses, particularly its cruise ship division which is struggling to shake off headwinds from the Covid-19 pandemic.

Reflecting the underperformance of the travel and leisure industry during the recovery phase, the Defiance Hotel, Airline and Cruise ETF [CRUZ] has fallen 28.2% so far this year. The larger decline of Saga, which as of 22 September is not among the fund’s holdings, could reflect the challenges faced by its insurance business in 2022.

According to our Chief Market Analyst Michael Hewson, sales of motor and home insurance policies, which are among Saga’s principal product lines, have impacted the overall performance of the insurance business. He describes the industry as “running 9% behind the same period [last year] due to a slowing in new business”.

Profitability paramount for share price activity

Saga's half-year earnings for 2021 underscored the impact of coronavirus-related headwinds. Retail broking revenues witnessed a 9.9% year-on-year decrease, to £93.8m. Meanwhile, travel revenues declined by 79.7%, to £10m.

Full-year figures were more encouraging. Although retail broking revenues fell 4.5% to £183.7m during the 12 months to January 2022, travel revenues rose by 83.5% year-on-year to £94.7m.

Nonetheless, the Saga share price fell 8.3% on 23 March following the release of these results. Although full-year revenues of £377.2m exceeded Financial Times analyst forecasts by some 6%, losses of 11.1p per share were around one-fifth lower than the consensus estimate of a 9.27p loss. Evidence of profitability is therefore expected to be a key determinant of market confidence following the interim results on Tuesday.

According to Hewson, Saga expects £35m to £50m in pre-tax underlying profit for the current fiscal year. Analysts polled by the Financial Times forecast earnings per share of 20.3p to 23.7p for the full year, with a consensus estimate of 21.63p. Any indications of whether the company is on track to reach these levels in the half-year report could impact the share price.

Which parameters could signal a turning tide?

As part of the preliminary 2021 results statement, Saga Chairman Roger De Haan said he was “pleased with the progress” the company had made in the face of challenging external conditions. He highlighted the “turnaround strategy” that the company’s travel arm had executed.

“We are making significant changes to our Tour Operations business,” he said, “in order to create a lower-cost, more agile and digitally-led operation, focused on the evolving needs of our customers.”

The insurance business was also bolstered in anticipation of regulatory changes that came into effect in January. With the legislation designed to eliminate price differences for new and existing customers, the insurer expects that customers may be more inclined to focus on product and service quality from 2022 onwards. The company accordingly reported a focus on enhancing systems and senior management for maximum customer retention.

Evidence of the revival and transformation of the Saga travel business, as well as robust insurance customer retention rates, will be among the parameters for investors to watch in the upcoming six-month results.

Analysts forecast plain sailing for Saga

Ahead of the upcoming earnings announcement for the six months ended 31 July 2022, analysts are generally upbeat about the prospects for the Saga stock price. Four analysts offering 12-month price forecasts to the Financial Times yielded a median target of 190p, 33.1% above the latest close. While the most pessimistic forecast of 155p sees the stock gaining 8.6%, the high target of 305p would reflect a 113.7% increase in Saga shares over the next year.

As of 15 September, the four-analyst panel providing recommendations on the stock yielded two ‘buy’ and two ‘hold’ recommendations. This split vote includes one additional ‘buy’ recommendation from the previous three-analyst panel on 18 August.

Analysts polled by Investing.com were more bullish. Of the four analysts offering 12-month price targets, the average forecast is 312.5p, representing a 125.3% upside on the latest close. Meanwhile, the high target of 405p and low target of 220p would represent respective gains of 183.8% and 54.2% from the 22 September closing price.

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