Putting a rocket under Saga

published 22 April 2016

Saga (LSE: SAGA) is best known as a magazine sold to the over-50s, but its publishing arm is just one of five divisions, including insurance, travel and healthcare, all sold through the magazine. When its private-equity backers cashed out two years ago, they floated Saga and persuaded 160,000 loyal customers to buy shares in the company.

They have not done too badly, pushing through 200p this week, up 8% from the float price of 185p. Results released on Tuesday saw an increase in earnings and a hike in the full-year dividend to 7.2p. Its database of "contactable people" also crept higher, from 10.8 million to 11.2 million people in the last year.

But Saga could be about to get more aggressive. CEO Lance Batchelor hopes to "put a rocket under the shares" with a plan to free up cash, says Danny Fortson in The Sunday Times. Rather than run its insurance policies in-house, it will farm them out to third parties, including German insurance giant, Munich Re.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

That will free up capital and widen the range of products it can offer. It should also lower risk, by switching Saga from an insurance provider to a commission-collecting cash machine. According to brokerage Peel Hunt, the new model could release about £150m.

So far, Saga has hardly been a "barnstormer", says Fortson. In many ways, that is reassuring for its readers and investors. But if Batchelor can "pull off his makeover", the stock could promptly re-rate higher from 14 to 16 times earnings. "Buy."