Saga tumbles as board slashes dividend amid new strategy

Shares in Saga plunged on Thursday, after a disappointing set of preliminary results in which the provider of holidays and other services to the over-50s slashed its dividend, warned on profits for the coming year and flagged another change of strategy.

The FTSE 250 company said its full-year dividend would be cut to 4p from 9p a year ago, with an expected future payout of approximately 50% of earnings over the next few years, and took a £310.0m hit as it impaired the goodwill on its balance sheet.

While underlying profit before tax fell 5.4% to £180.3m, reflecting “strong” reserve releases, but a disappointing result from retail broking, the goodwill impairment led to a loss before tax of £134.6m from profits of £180.9m a year earlier.

The underwriting division was ahead 9.3% at £86.7m, which Saga said was supported by underlying reserve releases of £78m, while travel improved 2.4% to £21.1m, with the board describing “strong” forward bookings for cruise products.

Available operating cash flow was £180.6m, and Saga’s net debt narrowed to £391.3m with a net debt-to-trading EBITDA ratio of 1.7x.

With the group taking delivery of two new cruise ships, banking covenants in the revolving credit facility and term loan have had to be adjusted. The new net debt to EBITDA covenant will jump to 3.5x until August 2021 and 3.0x thereafter.

STRATEGIC SHIFT

In the third change of direction since floating in 2014, the board outlined another change in strategy in a bid to address the long-term challenges it sees.

Due to increasing commoditisation of the insurance market as it turned to price comparison websites to boost volumes, Saga plans to switch back to its old direct-to-consumer brand "with membership at its core", providing differentiated products and services that customers could not get elsewhere.

The company will launch a new insurance approach focussed on growing direct channels, with the launch of a three-year fixed price proposition, and with a new approach to renewal pricing.

Transformation of the tour operations will be accelerated, specifically its cruise offering, with investment poured into its new products and membership to build on the "early signs of traction".

Underlying profit before tax was expected to be between £105m and £120m in the 2020 financial year, due to a reduction in reserve releases, as well as a decline in broking gross margins less marketing costs from £80 to between £71 and £74 per policy.

Saga said slashing the dividend and amendments to its banking facilities provided a “robust” balance sheet, to support that strategic change.

“Over recent years Saga has faced increasing challenges from the commoditisation of the markets in which we operate, especially in insurance,” said Saga group chief executive officer Lance Batchelor.

“This has had an impact on both customer numbers and profitability," he said, with the long-term challenges faced by the company and these results demonstrating "that Saga cannot grow without a clearly differentiated offering to its customers".

NEW VISION LEADS TO 2020 PROFIT WARNING

In response, Batchelor has decided to launch a “fundamental change” to the group's strategy to return the whole business to its heritage as an organisation that offered differentiated products and services, giving customers and members a "compelling reason to come to us and stay with us".

A "first step" is the new approach to insurance, with a new three-year fixed price insurance offering that he said was a "powerful indication of our change in approach".

But underlying profit before tax for the 2020 financial year is now expected to be between £105m and £120m a result of lower margins in insurance, a change in approach to renewal pricing, lower reserve releases and investment in new products.

Linked to this was the "difficult decision" to reduce the final dividend to 1p, with analysts having expected around 3.5p, and the write-down of goodwill.

“The fundamental changes we are making are essential to address the long-term challenges facing our business. They will support future growth in customers and profits, and generate attractive cash flows for Saga.”

MARKET REACTION & ANALYSIS

As at 0905 BST, shares in Saga were down 35.45% at 69p.

JMorgan Cazenove analysts said taking the new company guidance as a starting point, the mid-point of £112.5m would imply a 34% reduction in their FY20E underlying PBT forecast.

UBS said management execution ability is "now a major concern" as it was "the third time Saga has clearly disappointed the market" since its IPO, with 2020 guidance around 40% below the Swiss bank's existing expectations.

Analyst Nicholas Hyett at Hargreaves Lansdown said: "An increasingly price driven insurance market isn’t a new trend, and while the group’s made some slight innovations, including a three year fixed-price insurance contract, and is boosting marketing, it might all be too little too late. While the speed of deterioration has taken the market, and us, by surprise, there have been worries for some time that the Saga brand was losing its appeal at the lower end of its ‘over 50s’ customer base. Without brand loyalty, Saga is just another insurer.

"While the cruise line might be Saga’s shop window, it’s the car insurer that drives profits, and that needs to be a scale business. Cross-selling is all well and good, but a large proportion of the customers Saga needs to make insurance work will never go on a Saga holiday. In a market where insurance has become highly commoditised, Saga will need to work hard if it’s to create a reason for older drivers to knock directly on its door."

Broker Peel Hunt said: "Having struggled to execute a transformation strategy from underwriting to broking in 2018, it seems the business is on a weaker footing than we believed hence the Board has found that a more radical restructuring is needed that will put this year's earnings under pressure."

Numis said the pressure on broking earnings was worse than it had feared. "However, we think the company’s realisation that it needs to change its model to compete effectively in today’s insurance marketplace offers some hope that insurance broking profits can be stabilised at the lower level now expected for Jan-20, albeit with significant execution risk. Rollout of the new cruise ships remains a key driver of medium term profit growth."