Even though Saga’s (LSE: SAGA) shares have only been trading for a little over a week, the company has already come under attack from short sellers.
One of the world’s biggest hedge funds is betting against Saga, taking a short position equivalent to 0.6% of Saga’s float. Shorting the shares means that the fund is set to profit if Saga’s share price falls.
Thanks to this short bet, Saga’s shares have dropped almost 7% below the float price and almost £19m has been wiped off the value of private investors holdings.
However, this disappointing performance should be viewed as a buying opportunity, as Saga is well positioned as long-term buy and forget investment.
No better way
While Saga’s performance since its IPO has been disappointing, it is widely believed that the company’s long-term outlook is second to none.
Indeed, there is no better way to play the UK’s aging population. Overall 3.3 million people are poised to hit state pension age in the next five years and there will still be well over 600,000 people turning 65 each year until at least 2018. I don’t need to state the obvious but this is a huge captive market for Saga, which is one of the UK’s best known all-in-one retirement-service-companies.
And Saga has had no trouble profiting from the UK’s aging population during the past few years. According to the company’s management, Saga’s earnings have expanded consistently at about 7.5% per annum for more than a decade. It’s hard to put a valuation on steady long-term growth like this.
Saga’s business model is part of the reason for the company’s success. Traditionally, Saga is an insurance company. However, management does not like to associate Saga with insurance; instead, Saga prefers to be compared to other consumer companies.
Indeed, about 75% of Saga’s revenue comes from commissioned based sales, unrelated to insurance products. The only businesses Saga runs directly is its own motor insurance division, and domiciliary care operation.
Expanding for faster growth
Saga has plenty of plans for future growth and if the company can execute them successfully, the sky could really be the limit. In particular, Saga is drawing up plans to expand in a range of new areas, from wealth management to retirement villages.
Further, some analysts have speculated that Saga could start up its own pensioner bank for retirement savings. In reality though, Saga could choose to enter any new market, as, in the words of executive chairman Andrew Goodsell:
“…It’s very much a lifestyle brand, a way of life…”
Saga’s IPO was a key part of these growth plans. The company has been using debt to drive rapid expansion during the past few years and needed to pay down some debt in order to facilitate a return to growth.
As a result of the float and the cash raised, Saga’s net debt to earnings before interest, depreciation and amortisation should have fallen to three times, not five times as previously reported.
