Another big brand name is about to sell itself on the stock market.
And Saga – the provider of services for the over-50s – could be among the most popular yet: 700,000 customers have expressed an interest in buying shares.
With so much demand, the opening share price could be at the top end of the official price range – or maybe even higher.
So is this an exciting sequel to the Royal Mail flotation with easy profits for all? Or should you give it a miss? Let’s take a look.
What does Saga do?
Let’s start with some of the basic facts.
Saga is a business that offers a range of services to the over-50s. These include the Saga magazine, cruise trips, and a sizeable insurance operation. Insurance is the largest part of the business.
Saga is currently owned by a company called Acromas, which also owns the AA. Acromas is owned by several private equity firms as well as its senior management.
We don’t yet know what the offer price will be, but it’s expected to be in the range of 185p to 245p. That values the company at £2bn–£2.5bn. Although some debt will be paid off, Saga will still carry debts of £700m after the float.
If you want to buy shares, you need to apply by 11:59pm on Tuesday 20 May. You can do that online via the Saga website. Existing customers and employees get preference in the application process..
The main question to ask before you invest in any new listing
So should you buy in? Well, whenever a company lists on the stock market, I always want to know why it is happening.
Keeping things simple, there are three main reasons why a company might float:
• the owners of the company want to cash in their chips and sell
• the company wants to raise capital to invest and grow
• the company wants to raise cash to pay down debt
With Saga, it’s pretty clear that this flotation is happening for two reasons: to pay down debt, and to enable the owners to sell some of their shares.
And that makes me nervous.
If a company is raising money for investment, then I might get excited about it. It could be a promising growth story with the potential to make me money.
But when it’s a bunch of savvy private equity guys selling out, I worry that they’re only going to sell for a full price. After all, Acromas has waited until we’re five years into an equity bull market before selling. They want to get top dollar.
That’s great for investors in the private equity funds. But I don’t see why I should buy at or near the top.
Granted, Saga does have some strengths. It’s profitable and has a strong brand which most people in the UK are aware of. It doesn’t have to spend much on advertising as it has a great marketing database with 10.4 million names. And its customers appear to be satisfied – 88% of ‘active customers’ are repeat buyers.
What’s more, its management thinks there’s growth potential in wealth management and healthcare – which is probably true.
But I think these strengths are more than reflected in the proposed valuation. Saga made a pre-tax profit of £110m last year, which means that the company will probably trade on a price/earnings ratio in the high teens. That’s a bit steep for what is, fundamentally, an insurance company with a couple of secondary businesses in publishing and travel.
What’s more, there’s no sign of profits growth – pre-tax profits have been pretty much static for the last three years.
The Saga flotation looks like a big cash-in – steer clear
It’s also worth noting that the current executive chairman, Andrew Goodsell, is planning to become a non-exec boss within the next 18 months. He’s already made more than £100m from the company, and stands to make a further £80m if the flotation is a success.
That’s just another sign that this is just one big cash-in.
I also worry that some investors may buy in simply because they remember what happened with Royal Mail (LSE: RMG) last year. The shares floated at 330p last autumn and then soared to over £6 earlier this year. That was a great deal for investors – if not the taxpayer.
But not all stock market offerings perform that well. For example, earlier this year Pets at Home (LSE: PETS) floated at 245p. But the shares are now trading at 222.5p having fallen lower a few weeks ago.
I freely admit that there’s a danger that I’m going to miss out on the growth potential lying in wealth management and healthcare. But at this price, I’m happy to take that risk. I’m not buying.
If you want to read a more detailed analysis of the Saga stock market listing, read Phil Oakley’s analysis in this week’s edition of MoneyWeek magazine. If you’re not already a subscriber, sign up to get four free editions of the magazine, as well as full access to our web archive.
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