Saga Group PLC (LON:SAGA) is likely to see "little earnings growth" until 2021 as the over-50’s travel and insurance specialist spends more to attract new customers, RBC Capital Markets said.
RBC cut its rating on the stock to ‘sector perform’ from ‘outperform’ and lowered its target price to 135p from 250p, sending its shares down 1.2% to 123p in morning trading.
READ: Saga plunge after profit warning raises questions of trust for over-50's insurance and travel group
The downgrade follows an update for the period from 1 August 2017 to 5 December 2017 from Saga earlier this month when it warned of more “challenging trading” in insurance broking.
At the time it also said its tour operating business would see a one-off cost of about £2mln due to the impact of Monarch Airlines going into administration.
The company said it intends to increase its annual customer acquisition spend by £10mln from next year.
RBC said it was less positive on the broking business due to weaker top line growth and margins than previously expected, and a significant accounting tailwind which will disappear in fiscal year 2019.
“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.”
READ: Saga warns of more “challenging trading” in insurance broking, Monarch collapse impact on travel
“Further, the pricing structure of the broking business is less attractive than we previously thought."
The broker expects Saga's margins to weaken in the near term for the broking business as it invests more to lure in customers. It sees “little earnings growth until 2021”.
“We reduce our EPS (earnings per share) estimates by 21% on average (FY19E-20E) driven mainly by the broking segment.”