For investors, will there be more rewarding trips than Saga can offer? Phil Oakley investigates.
Saga began life in 1950, when its founder Sidney de Haan bought a hotel in Folkestone and started selling packaged holidays to pensioners. The business then gradually branched out into Europe and other parts of the world. It focused on selling holidays during off-peak periods to the over-50s, who generally had more flexibility to travel at these times. Saga Holidays was listed on the stock exchange in 1978 but was taken private by the de Haan family in 1990.
During the 1980s Saga set about diversifying from the holiday business and began selling insurance products. It bought its first cruise ship in the 1990s. In 2007 it began providing home care services for the elderly.
In 2004 the company was bought by its management and Charterhouse private-equity investors. They are now looking to sell a slice of it back to the public on the stock exchange, and pay down debt with some of the proceeds. So should you buy in or leave well alone?
How has the company fared?
There’s no doubt that Saga has built up a decent brand with the over-50s over the last 64 years. It would seem that the main reason to buy some shares in the company is that this section of the population is set to grow significantly in the years ahead. According to Saga, there were 22.8 million over-50s in the UK in 2013.
That number will grow to 29.1 million over the next 20 years. More importantly, the over-50s are the most affluent members of society.x Many of them are already retired with generous pensions and significant amounts of equity in their homes. In other words, they have plenty of money to spend. Saga thinks that it can profit from these developments and make more money for its new shareholders.
The company currently sells to 2.1 million households in the UK who each buy an average of 2.7 products. It also has 8.4 million customers on its database. While not all of these will buy a product, Saga believes that it can make more money by selling more services to existing and new customers. It also has plans to move into new areas such as home care services and wealth management.
Are there profits in the grey pound?
That’s all well and good but is Saga really a way to make money from the grey pound? There’s no disputing the fact that moneyed pensioners have and will be spending more money on things such as cruises and might want someone to help manage their wealth. But on the face of things, Saga doesn’t look like a company that is hugely profiting from these trends just now.
Instead, Saga looks more like an insurance company. If you look at the chart on the left then you can see that more than 90% of its profits last year came from selling insurance (and almost half from motor insurance) and financial services. Travel accounted for just 5% or trading profits of £10m.
Insurance is a tough place to be right now. It is an intensely competitive industry, while at the same time motor insurance premiums have been falling, making companies less profitable. Insurance companies also have to hold more reserves to make them less risky, which also makes it hard to make high returns for investors. If you have a look around at the moment, you’ll see that insurance companies do not command high valuations (high price/earnings ratios) on the stockmarket.
As far as travel is concerned, Saga clearly has a good cruise business that operates in a growth market. The trouble for potential investors in the company is that this business is not big enough to transform it. There is also the fact that many people don’t want packaged holidays and that low-cost airlines and the internet make it easier for them to make their own arrangements.
This might not matter if Saga was priced accordingly. So is it? A frequent problem with initial public offerings (IPOs) is that they are priced to maximise value for the seller, not the buyer. Legendary value investor Benjamin Graham avoided IPOs for this reason. I’d tend to agree – unless, of course, the government is the selling shareholder, as with Royal Mail.
Unfortunately, it seems that Saga’s shares are going to follow the typical IPO pattern, and be priced at too high a level. Based on the mid-point of the indicated price range of 185p-245p (so 215p), Saga would have a market value of £2.3bn. This would equate to 21 times last year’s after-tax profits. With around half of those profits to be paid out as dividends, the indicated dividend yield of around 2.4% is not particularly appetising either. These are the kinds of valuations paid for companies capable of growing their profits at a high rate for a long time. Saga might be able to do this, but its profits have barely grown at all since 2012.
Should you buy the shares?
Having a look through its accounts and crunching some numbers, it would seem that Saga is a reasonable but unspectacular business, based on the profits it makes on the money it has invested. Saga made an after-tax profit of £110m last year on equity of £1.1bn – a return on equity (ROE) of 10%. For a business to be valued at £2.3bn or more, I would suggest that ROE needs to be a lot higher.
So I’d pass on Saga shares unless they end up being significantly cheaper. However, if you would like to take the risk and buy some shares, the deadline for applications is Tuesday 20 May. Unconditional dealing in the shares will begin on Thursday 29 May.