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Saga plunge after profit warning raises questions of trust for over-50's insurance and travel group

Saga’s shares had plunged by 23% in value in afternoon trading - a 41.9p drop to 139.4p - after the FTSE 250 listed firm said it now expects its full year growth in underlying profit before tax to be in the region of 1-2%, compared to the 5.5% achieved at the half year
Saga cruise liner
Analysts at Swiss bank UBS pointed out that Saga shares have persistently traded at a discount to its peers but they had expected that discount to close

Older people tend to be more trusting than younger ones, but the travails of Saga PLC (LON:SAGA) following a profit warning today shows the over-50’s insurance and travel specialist will need to do a lot to rebuild the stock market’s trust.

Saga’s shares had plunged by 23% in value in afternoon trading - a 41.9p drop to 139.4p - after the FTSE 250 listed firm said it now expects its full year growth in underlying profit before tax to be in the region of 1-2%, compared to the 5.5% achieved at the half year.

READ: Saga warns of more “challenging trading” in insurance broking, Monarch collapse impact on travel

The group said the profit fall reflects more challenging trading in its insurance broking business and the impact of the collapse of Monarch Airlines on its tour operating arm.

Nicholas Hyett, equity analyst at Hargreaves Lansdown commented: “The collapse of Monarch Airlines and industry wide headwinds in home insurance are outside Saga’s control. But lower reserve releases and a rapid decline in benefits from the introduction of the motor broker panel shouldn’t be coming as a surprise to management.”

He added: “The fact that the group feels the need to throw more cash at customer acquisition is also less than reassuring. Saga’s pitch was always that its huge mailing list means all the clients it could ever want are just a mail drop away, the extra spending suggests it might not be as clean cut as that.”

Trust may take time to rebuild

Meanwhile, analysts at Swiss bank UBS pointed out that Saga shares have persistently traded at a discount to its peers but they had expected that discount to close as the group consistently delivered on previous 5% profit guidance as it rotates earnings towards broking.

In a note to clients, the UBS analysts said: “This year, and next, Saga is evidently not able to do that, and this raises concerns that the issues in home are more structural and growth elsewhere is insufficient to offset.”

They concluded though that “expectations remain low" which is "not unreasonable, in our view.”

UBS, therefore, retained a ‘buy’ rating and 230p a share 12 month price target on the stock.

Motor broking business a ‘silver lining”

Similarly, analysts at RBC Capital remained upbeat on Saga shares despite today’s shocker, repeating an ‘outperform’ rating and 250p target price.

The analysts said: “The trading update is clearly negative for the company in the short-term, but we believe that the additional customer acquisition spend for targeted marketing will be positive for the future growth of the company to capture new business."

They added: “Commentary for the motor broking business is positive as the company is seeing ‘strong performance’ in this area and this provides a silver lining.”

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Saga Group Timeline

Newswire
June 21 2016

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