What Should You Do About The Saga Flotation?

As you’re probably aware, over-50s specialist Saga is coming to the stock market.
 
Private equity firm Acromas, which owns the group, is selling a 25-50% stake in it — and time is running out if you’re considering subscribing for some shares: applications close on May 20th.

So should you buy? The answer is ‘probably not’ if you’re looking for an enormous instant profit, of the sort we recently saw with Royal Mail. Saga’s owners are too canny to give away that much of a bargain.
 
Needless to say, of course, that’s not the only reason for buying shares in the business. So should you?

Strong brand

Let’s step back a moment. What is Saga’s greatest asset? What, in other words, is a newly minted shareholder actually buying?
 
And the answer is this: the trusted Saga brand, and the marketing machine that lies behind it.
 
Saga has a 96% brand awareness in its target market — the fastest-growing demographic group in the country, the over-50s. According to the share prospectus, Saga’s marketing database contains just under half of the UK’s 22.8 million people who are over 50.
 
And Saga doesn’t just market to these people. With a 60-year history of catering exclusively to the over-50s market, the company can reasonably lay claim to understanding the needs of the over-50s better than most.
 
The result? An ability to offer the over-50s marketplace a mix of ‘age optimised’ financial and travel products — car insurance, home insurance, legal services (such as conveyancing and probate), savings accounts, credit cards, cruises, hotel holidays, and short breaks.

Developing potential

Which neatly brings us back to the share offering. Because as well as paying down debt, the plan calls for Saga to invest in developing still more products and services to sell to the over-50s.
 
Wealth management is mentioned, for instance, as is home care.
 
And to see the potential of that, just look at how Tesco has bolted a huge range of services on to its basic supermarket offering.
 
So put another way, Saga could actually turn out to be a decent growth share.

A dying era

It could also, of course, be a complete turkey.
 
Many of today’s Saga customers, for one thing, are from the ‘final-salary pension’ generation, and will be enjoying in retirement and pre-retirement a much greater level of affluence than the generations set to follow them.
 
And for Saga, that means that the ‘grey pound’ could sharply devalue.
 
Tomorrow’s over-50s, what’s more, are likely to be savvier Internet shoppers than their predecessors — meaning that Saga’s trusted ‘one-stop shop’ brand might not bring in as much revenue as before.
 
What’s more, despite the extensive range of products that Saga sells, 96% of profits come from just one business line: insurance. Strip away the hype, in short, and what you’re really buying is a specialist insurance company.

Running the numbers

So how to weigh all this up? We won’t know the final price to buy Saga shares until the allocation process takes place after applications close at midnight on May 20th. But we do know the range in which the final price will be struck: 185p to 245p.
 
Which means, based on the published accounts and that share price range, that a price somewhere in the middle will put Saga on a P/E ratio of just over 15 time earnings.
 
Which is certainly dearer than the market as a whole, to be sure: the FTSE 100, for instance, is on a P/E of 13.7.   We can also get a handle on Saga’s likely yield, which at around 3.3% is lower than that of the market as a whole — although shareholders will have to wait until June 2015 for their maiden dividend.
 
What’s more, given the importance of insurance to Saga’s business model, it’s also instructive to compare Saga with Direct Line Insurance, which itself came to market back in 2012.
 
For with Direct Line trading on a 2015 forecast P/E of under 10, and offering a prospective yield of 6.0%, it’s difficult to escape the conclusion that Saga offers half the income of Direct Line, on a rating that’s 50% richer.

So should you buy?

At the risk of being controversial, I’m going to suggest that the answer depends on your age. For perversely, I see Saga being a better investment for those outside its target customer market, than in it.

But for younger investors able to sit back and wait for Saga’s management to deliver the upside, there’s every prospect of decent capital growth, and a solid if unexciting income in the meantime.
 
So should you buy? Consult your birth certificate.