Saga PLC (LON:SAGA) has a number of strategic options that will help it to “bounce back” from the downturn in travel caused by the coronavirus pandemic, according to analysts at Peel Hunt.
In a note on Monday, the broker retained its ‘hold’ rating and 50p target price on the over-50s focused travel and insurance firm, reflecting what they said was an “undervalued business with an uncertain outlook”.
“We believe the company has a number of strategic options, of which we prefer a divestment of the insurance underwriter. Also, the Travel business is ready to bounce back as soon as restrictions are lifted, the timing of which will also influence any strategic decisions”, Peel Hunt said.
Resilient trading
Peel Hunt’s assessment followed a trading update for the period to June 21 from February 1, in which Saga said it had made “good progress” with its insurance business proving “resilient” during the disruption.
The company said insurance had performed well across its home, motor and private medical segments, although this had been partially offset by an expected reduction in the sales of travel insurance.
Despite this, total policies for the period fell 5% year-on-year to 620,000 as a result of the decline in travel, with the company adding that market conditions “continue to be challenging” as more competitive conditions returned in June.
READ: Saga shelves dividend but says insurance business provides coronavirus flexibility
Meanwhile, the company said its travel business has “remained on pause” since a decision to suspend operations in mid-March due to the pandemic, although it expected some travel to resume this year and retention levels continued to be high particularly in its cruise business, with 70% of guests having moved their bookings to later sailings”.
Saga also said despite the disruption its liquidity remained strong and that it had delivered around £15mln in run-rate cost savings during the period.
The firm added that it has also undertaken a review of costs in its travel business during the disruption to reduce its near-term marketing spending among others. The move, Saga said, is expected to lead to an extra £20mln in-year cost reduction and reduce the cash burn of its tour and cruise businesses by £6-8mln per month.
Looking ahead, the company said its near-term priorities were to “preserve cash and reduce leverage”, adding that it expects to remain in compliance with key banking covenants.
"Saga has made good progress against the priorities set last year and we have accelerated this change given the backdrop of the COVID-19 crisis. We have been clearly focused on serving our customers and keeping colleagues safe through this period of major disruption”, said Saga chief executive Euan Sutherland.
“What is clear is that we play a really important role in the lives of our customers and this underlines my belief in the strength of the brand. I am excited about what we will be able to achieve with a tighter focus on differentiated products and the right investment in strengthening our digital capabilities and driving our brand and membership proposition", Sutherland added.
William Ryder, Equity Analyst at Hargreaves Lansdown, said despite the resilient trading, Saga “needs its cruise ships to get cruising and its tours to get touring again as soon as possible”.
“We don’t know how profitable these operations will be in a world of social distancing, but anything will be welcome. The sooner the travel division can start making money again the better, without it the group may need further shareholder support to secure a long term future”, he added.
Saga’s shares rose 2.4% to 18.9p in mid-morning trading.