The Saga (LSE: SAGA) share price rose by more than 35% when markets opened this morning.
Investors were rushing to buy Saga stock after the over-50s insurance and travel group revealed plans for a £150m fundraising and the return of former owner Sir Roger De Haan.
The firm also revealed that it recently rejected a provisional takeover offer of 33p from US investors.
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Management hopes that the combination of fresh cash and Sir Roger’s leadership will return Saga to growth. Although this situation isn’t without risk, I think there’s good reason to be optimistic about today’s news.
What’s the plan?
Sir Roger De Haan owned and ran Saga for 20 years until the group was sold in 2004. He’s now committed to invest up to £100m in new Saga shares. Around £60m of this investment will be made at 27p per share, which is double last week’s closing price of 13.6p.
The remainder of Sir Roger’s investment will be made on the same terms that will be offered to other shareholders, with a maximum price of 15p per new share. If the equity fundraising goes ahead, Sir Roger will join the firm as chairman.
I suspect some shareholders might be questioning why the company has refused a possible bid from US investors at 33p per share. Saga hasn’t provided any information on this, but I think it’s worth remembering that Saga’s share price was 45p before Covid hit in February.
In my view, a 33p offer is likely to be pretty opportunistic. I would be surprised if the company isn’t worth more than this within a couple of years.
Why I think Saga will recover
The business already had problems before the pandemic struck. Saga’s share price has fallen by around 90% over the last three years.
From what I can see, the main problem was that the company had become complacent, relying on older customers to pay higher prices than they’d get elsewhere. But before Covid struck, initiatives such as multi-year fixed price insurance offers were already helping to regain customer loyalty.
The group’s cruise business was also doing well. Sailings are suspended at the moment, but cruise customers are very loyal. In June, Saga said that 70% of passengers with cancelled bookings had accepted credits against future cruises instead of refunds.
When cruising starts again, I think the company’s smaller, boutique ships will be a popular choice with older cruisers, who may be more health-conscious.
Saga share price: I’d buy
Saga’s challenge is to differentiate itself in a world where you can always find a cheaper deal online. With a strong brand and a core customer base of fairly affluent over-50s, I don’t think this should be too difficult. I’m optimistic that Sir Roger’s return should help the group return to growth.
Meanwhile, cash from the £150m fundraising should provide breathing room and allow the group to repay some of its debt.
Ahead of today’s news, brokers were forecasting a profit of £16m in 2020/21, rising to £65m in 2021/22. These numbers price the stock on seven times current year earnings, falling to just three times earnings next year.
That looks very cheap to me for a company with a solid brand and profitable business. I think the Saga share price looks like a buy after today’s news.
