Saga PLC (LON:SAGA) shares slid on Monday after UBS downgraded its recommendation on the stock following a profit warning from the over 50s insurance and holiday specialist.
Last week, Saga cut its dividend after swinging to a loss before tax of £134.6mln in the year to 31 January 2019, compared to a £180.9mln profit before tax a year ago. Revenue fell by 2.2% to £842mln, due to poor performance in its retail broking business.
Saga also warned that a new strategy to turnaround the performance of its retail broking unit would dent underlying pre-tax profit in 2020.
READ: Saga Group slashes dividend as it warns insurance turnaround plan will hit profits
UBS cut its rating on Saga to ‘neutral’ from ‘buy and its target price to 65p from 150p. The broker also downgraded its earnings per share forecasts for 2020-2024 by 38-44%.
“Since its IPO, Saga has now profit warned twice and removed its medium-term earnings growth guidance,” the investment banks said.
“We find further execution risks around the new strategy, which we expect to weigh on the price-earnings multiple.”
Specifically, UBS thinks Saga’s plan to launch new home and motor policies with three-year fixed pricing bring risks around capital requirements in the broking unit.
USB said another headwind to earnings was Saga changing its renewal practices in response to a Financial Conduct Authority investigation into how insurance firms price home and motor policies.
“Saga is tapering the margin it earns on some of its highly profitable back book home products,” UBS noted.
“Saga had already performed this exercise before, given its potentially vulnerable customer demographic. These actions represent a more than £10-15mln earnings headwind off a base of £100mln.”
UBS suspects Saga has been prudent, given it was already rebasing earnings and thinks risk are increasing around the FCA probe with companies starting to act now, particularly those with exposure to home insurance like RSA Insurance Group PLC (LON:RSA) and Direct Line Insurance Group PLC (LON:DLG).
In late morning trading, shares in Saga fell 8.2% to 61.05p.