RBC Capital downgrades Saga, says stock is fairly valued

RBC said FY17 earnings per share will not be surpassed until FY21E as Saga spends more to attract new customers, adding that the longer-term opportunity remains attractive but the stock is fairly valued for now.

The bank cut its motor broking segmental profit before tax estimate by 38% on average for FY19-20 due to weaker top line growth and margins than it had previously expected, and a significant accounting tailwind which will disappear in FY19.

"Our previous buy case was centred on footprint expansion and margin improvement in the broking segment, which we now do not expect Saga to achieve in the near term. Further, the pricing structure of the broking business is less attractive than we previously thought.

"Saga's retail business operates on a spread basis so its revenue is affected by pricing from its underwriting panel, and external competitive pricing pressures. The revenue for peers, in contrast, is more resilient as it is based on a percentage of premiums or fixed fee, so there is less need to sacrifice revenue for volume."

Still, RBC said it still reckons the longer-term opportunity for Saga is positive as the UK has an ageing demographic and spending power for this group is increasing.

"Our brand awareness survey from November 2017 shows that Saga is the No.1 brand in the 60+ age group," it added.

At 0955 GMT, the shares were down 0.7% to 124.50p.