The Covid-19 devastation of the travel industry hit Saga (LSE: SAGA) hard. Some stocks have been bouncing back, but not Saga. Until the past week, that is. By the end of August, the Saga share price had collapsed, down 70% in 2020. But in these first few days of September, we’ve seen a 30% jump. So what’s it all about?
The sudden uplift was triggered when the company revealed that it is “at the advanced stage of a prospective £150 million equity capital raise.“
Former boss Sir Roger De Haan is to return as chairman too, and invest up to £100m in the equity raise. Sir Roger and his family owned Saga before selling to private equity group Charterhouse in 2004. And he served as chief executive and chairman for 20 years. The proposed new financing deal looked like a positive step on its own. But Sir Roger wanting in with such a big stake means he surely sees the Saga share price as too low. I agree with him (though I probably won’t invest £100m myself). And I think this makes for a bigger boost in confidence than the fundraising itself.
Market optimism
The market seems to think so too. But we do sometimes need to be wary of the return of previously cherished bosses to companies they used to run. I’m reminded of the return of Julian Dunkerton to Superdry, the firm he founded, in 2019. That has not brought about a positive change in fortunes so far, unfortunately, and Superdry still struggles. Like Saga, the pandemic hit Superdry badly. And also like Saga, Superdry had been suffering a downturn well before then. But that’s where I think the similarity ends. No, I’m seeing the return of Sir Roger to Saga as a firmly positive step.
Yes, the Saga share price deserved a significant fall. After all, the bottom had fallen out of its business. And its target market, the over-50s, will account for a fair proportion of those considered in high-risk Covid-19 groups. It’s not Saga customers currently crowding the beaches of Portugal and worrying about whether they’ll get home in time to beat any new quarantine rules.
Saga share price turning
But I see Saga as a fundamentally sound company. It offers in-demand services, and has a growing clientele. And the holiday business will take off again, hopefully sooner rather than later. The outlook makes the shares look super cheap to me now.
Forecasts suggest a 70% fall in EPS this year, and I won’t argue with that. But even then, we’d be looking at a P/E of only around six. And an EPS recovery pencilled in for next year would drop that to just two or three. The market has priced Saga to go bust. But I see this new infusion of funding as coming close to guaranteeing that won’t happen.
The equity raise will be kicked off around the time of Saga’s interim results, due on 10 September. Its success looks pretty much assured. At today’s Saga share price, I’d buy.
