Saga’s Share Price Collapses 20% As It Warns On Profits. Time To Buy In?

Saga’s share price slumped 20% on Tuesday as insurance-related troubles prompted it to warn on profits.

At 107p per share Saga’s share price has now collapsed around 70% during the past 12 months. As a result the business — which provides insurance services and holiday packages to the over-50s — now trades on a forward price-to-earnings (P/E) ratio of 5 times.

Swing To Losses

In today’s half-year report Saga announced a 65% year-on-year improvement in revenues. These clocked in at £258.3 million for the period to July thanks to a recovery in its travel operations.

The business offers luxury holiday experiences like ocean and river cruises, escorted tours and hotel vacations. And it said today that its core Ocean Cruise division “secured strong bookings” during the first half “and is on track to achieve our targets for this year and next.”

However, Saga said that “challenging” conditions in the UK insurance market weighed on the group. The small cap share consequently swung to a pre-tax loss of £257.5 million between February and July from a profit of £700,000 a year earlier.

On an underlying basis, profit before tax stood at £14 million in the first half. It had recorded a £2.8 million loss a year earlier.

Insurance Woes

Saga offers products across the motor, home, travel and medical insurance sectors. Right now it is being battered by high levels claims inflation which currently stands at around 13%.

On top of this, Saga said that it has been hampered by regulatory changes at the start of 2022. Under new Financial Conduct Authority (FCA) rules, insurers are no longer allowed to charge existing customers a higher price for renewing a policy than they would give a new customer for comparable cover.

On the plus side, Saga said that the number of in-force policies had grown 3% year on year in the first half. But while the number of travel insurance policies climbed back towards pre-pandemic levels, sales of new motor and home policies were lower from the same 2021 period.

Forecasts Slashed

Saga’s disappointing first half has consequently prompted it to reduce its full-year profits forecasts.

The company now expects to generate underlying pre-tax profit of between £20 million and £30 million during the 12 months to January 2023. This is down from its previous estimate of £35 million to £50 million.

The Bull Case

As an investor I like Saga’s exceptional brand strength. It is a popular choice for older people seeking a trip abroad or insurance cover, and this is a demographic that has a lot of cash to spend.

I also like the exceptional long-term opportunities it could have as Britain’s population rapidly ages. The Office for National Statistics thinks that 20% of UK citizens will be aged 65 years or over by 2030.

Charlie Williams, analyst at Hargreaves Lansdown, notes that “for the long term … Saga’s unique offering to the ‘grey pound’ works well.”

Furthermore, he says that “with many of its customers likely to have paid off their mortgages… [they are] more insulated than most from further interest rate rises.” This could give it extra robustness during these tough times.

However…

Having said that, I won’t be grabbing a slice of Saga following recent share price falls. The issue of soaring cost inflation is one that threatens to get worse as supply chain issues roll on. There’s a good chance in my opinion that more profits warnings could be coming down the pipe.

In addition, the recent uptick in holiday bookings and consequently travel insurance sales could run out of steam as consumer spending comes under pressure. And insurance pricing could come under rising strain too as customers shop around more in an ultra-competitive market.

Saga shares are cheap. But this reflects the multitude of rising risks it faces. I’d rather buy other UK shares today.