Saga shares took a beating yesterday morning, dropping from 144 at the opening to bounce off 135 and largely take back much of those losses in afternoon trading. The stock was pulverised on Tuesday when it fell from 180 on a profits warning from the company.
Saga shares – loved by the City, detested by the market
Saga launched an IPO in 2014 at 185 and the City has been largely positive about the business and its prospects. But but why then are Saga shares doing so badly, and should we be looking for more woes in 2018?
First off the collapse of Monarch is a big piece in the Saga puzzle. This put a £2 million hole in Saga’s operations and we can certainly see how that would be an unforeseen expense for any travel company. But Saga is not just a travel operator – it is also involved in insurance broking, and it is home and travel insurance that has been spoiling its party.
We’re big fans of diversification here at The Armchair Trader: where it makes sense. There is sense in Saga selling travel insurance to its customers. But we have seen too many tales of woe begin with what we like to call mission creep – a company begins to get involved in new areas which, perhaps, are outside its comfort zone. Saga is a travel company, not an insurance broker.
Saga says it expects growth in profits of 1-2% for the year to the end of January but sadly it is also forecasting a 5% drop next year due to “headwinds”. Ever since the Brexit vote The Armchair Trader has been bearish on the UK travel sector. For starters, we felt the weaker pound would undermine travel stocks that relied on foreign holidays. We foresaw a boost to domestic tourism, but Saga has most of its chips staked on foreign travel.
UBS has pointed out that Saga shares have persistently traded at a discount to peers. The bank had expected Saga to close the gap, particularly if it could realise revenues from broking. Saga is moving towards what is called an affinity broker model for its insurance, where the underwriting is taken on by a third party, and this is causing the company some pain. Did we mention that Saga is a travel company, not an insurance company?
Upon reflection we also think City analysts are somewhat at fault here. There have been high expectations of Saga shares which the company has sadly not been able to fulfill in adequate measure. You can hear brokers rebooting their price targets as I write this. Numis recently cut theirs by 50p to 185p which is fairly hefty.
The Armchair Trader says:
Saga shares will continue to lose ground as the company suffers its ongoing identity crisis and also seeks to navigate those “headwinds” – i.e. the impact of Brexit on the UK travel operators. A big macro theme for us in 2018 will be higher interest rates and inflation in the UK which will also impact the affordability of overseas holidays for many. We can’t see anything on the horizon that will mean good news for Saga. At the very best, you could hang on to Saga shares for the dividends, but if you want your money to work hard in 2018, look elsewhere.