While many of its customers are ageing energetically, Saga (LSE: SAGA) has been looking increasingly over the hill.
The provider of services such as insurance that specialises in customers aged over 50, has seen sales collapse and made losses for four years on the trot. The Saga share price has fallen 40% in a year. Over five years, the picture looks even worse, with a 90% decline.
But has the company turned the corner, meaning it could now be a bargain for my portfolio?
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Upbeat trading statement
Losing money for four years in a row is a red flag for me. I aim to invest in firms with a proven business model. Consecutive losses like this raises a concern in my mind that the Saga business model lacks robustness.
But the company issued an upbeat trading statement this morning, covering a period from August until this week. It expects revenue to show growth of 40-50% compared to the prior year period. It said it remains on track to report underlying profit before tax for the full year of £20m-£30m.
Strong recovery in its cruise and travel businesses are helping Saga to build its revenues again. Cruise revenue for the year is expected to double compared to last year.
The insurance business is looking less healthy though. Policy sales in the insurance broking division are declining. The underwriting business is grappling with double digit percentage claims inflation.
Unconvincing business model
On paper, I think Saga has brilliant potential as a business. Its focus on a particular demographic that often has specific, costly needs and money to spend on solutions for them could be very lucrative.
But the business has struggled to deliver on this potential. Net debt stood at £721m at the interim stage and is expected to end this month slightly higher than that. Discussions with lenders have improved Saga’s flexibility in managing its borrowings, but its balance sheet remains alarming to me for a lossmaking company with a market capitalisation of £222m.
The positive figure for underlying profit before tax may sound like good news. However, I prefer to focus on the reported profit not the underlying one. Last year, for example, an underlying pre-tax loss of £6.7m compared to a much larger reported pre-tax loss of £23.5m. The prior year saw an even more dramatic disparity, with an underlying profit before tax turning into a £61.2m pre-tax loss on a statutory basis.
More work to do
Saga is not out of the woods as a business despite surging sales revenues. Its core concept of focussing on the well-heeled older market for big ticket purchases like insurance policies and cruises remains appealing to me. In the past it was very profitable for the firm. Soaring sales could help that happen again, potentially boosting the Saga share price.
For now though, the company is heavily indebted and has a history of losing money in recent years. While demand for travel is recovering, it remains below pre-pandemic levels. Saga’s insurance business could see profits squeezed from a challenging market environment.
I am not convinced the Saga share price will turn out to be a bargain. I do not like its risk profile or debt pile and will not be adding the company to my portfolio.
