Investors looking for an impressive recovery story need check no further than Saga (LSE: SAGA) shares. The price has climbed 150% since a 52-week low in October 2022.
The shares got an extra boost from a full-year update this week. The company said it “expects to report significant growth in revenue“. That should amount to an increase of between 40% and 50% compared to the prior year. And it’s thanks to a recovery in the cruise and travel business.
Profit before tax should be between £20m and £30m. That’s still some way short of profit levels from before the pandemic. But considering the added pressures from inflation and interest rates, I think it’s an impressive performance.
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Disposal
In other news the same week, the company confirmed it’s discussing the possible disposal of Acromas Insurance Company.
That highlights what I see as one of Saga’s key long-term strengths. It’s not just a cruise and travel operator. That can be a capital-intensive business, and can lead to a lot of debt on the balance sheet. At the halfway stage at 31 July, Saga reported net debt of £721m. For a company with a market cap of just £256m, I find that seriously concerning.
As well as the risk brought by debt during tough economic times, it makes share valuation harder. For the year ending 2024, forecasts put Saga on a price-to-earnings (P/E) multiple of under seven. On the face of it, that might make it look like a screaming buy.
Adjusted valuation
But by including net debt in the calculation, we can arrive at an adjusted P/E for the business itself. Based on the same 2024 forecasts, it comes out at around 25. Suddenly, it doesn’t look like quite the no-brainer any more.
The P/E should hopefully keep coming down if Saga’s recovery continues to make progress. But that recovery needs to span a dark economic period. High inflation, high interest rates, supply chain problems, geopolitical strife… all will surely be with us for some time yet.
Business model
Against that background, I do like the insurance side of the business. It’s potentially less capital intensive, even if still a bit pressured by an economic squeeze. I’m not too worried by the possible disposal of Acromas, which Saga says underwrites around 25%-30% of its insurance business.
The company reckons a disposal would still be “in line with the evolution to a capital-light business model and the stated objective to reduce debt“.
Verdict
So, does Saga’s recovery make it a no-brainer buy? Well, I think the economic risks it faces keep it well away from that description for me.
I like the evolution of the company, and its diversification into travel-related services. But the valuation holds me back, particularly when I account for debt.
We’ve seen numerous tentative recoveries recently that fell back again. And I can’t help fearing that this might turn into another. I do believe I see long-term potential, but I’ll wait for the short-term risks to play out.
