Saga PLC (LON:SAGA) shares plunged after JPMorgan Cazenove downgraded the stock, saying competitive markets are adding to margin pressures.
The company, which provides insurance, holidays, healthcare and financial services to people aged 50 and over, in January said home and motor insurance market continues to be competitive.
READ: Saga trading in line with expectations despite competitive insurance market
It said falling average premiums and some upward pressure on net rates in the home insurance arm hurt broker revenue and profits between 1 August 2018 to 15 January 2019.
“Saga, in our view, faces margin pressure across its broking business, as competitive conditions continue to weigh on industry profitability,” J.P. Morgan said in a note to clients on Friday.
The investment bank downgraded its rating on the stock to ‘underweight’ from ‘neutral’ and cut its target price to 120p from 140p.
J.P. Morgan noted that several larger UK motor insurers have reported in the past week and have described industry pricing that is failing to keep pace with claims inflation.
“Given that Saga is seeking to return to policy growth after many years of declines, this is an unhelpful backdrop, we believe, while travel may also be seeing pressure due to Brexit uncertainty,” it said.
Saga has said it expects a non-cash impairment charge of £6mln related to the Saga Pearl II and Saga Sapphire cruise ships leaving service in April 2019 and June 2020.
“Saga is taking on a significant amount of new debt in the next two years to fund its two new cruise ships and, in our view, remaining below 3.0x at the leverage peak looks increasingly challenging,” J.P. Morgan said.
“Thus, we see little scope for a re-rating currently, as any further pressure could raise the question of dividend sustainability."
J.P. Morgan reduced its estimates, which remain below consensus, by 2% and 4% for fiscal years 2010 and 2021, respectively.
Shares dropped 8.5% to 112.3p in morning trading.