Saga (LSE: SAGA) was enjoying a bit of a renaissance in the early days of September, gaining strongly after the announcement of a £150m capital raise plan. But barely more than a week later, the Saga share price plunged 9% on the back of interim results.
The over-50s holiday firm recorded a statutory pre-tax loss of £55.5m, which it said is “due to prudent £60m impairment of Travel goodwill, reflecting impact of COVID-19 on perceived travel industry risk“.
The company reported an underlying profit figure of £15.9m. But it also revealed an operating cash outflow of £23.2m, compared to an inflow of £24.9m for the same period last year.
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Adjusted net debt (excluding cruise operations) rose only a little, to £410.7m from £397.9m. But the collapse in profit pushed Saga’s leverage up sharply. We’re looking at a net debt to trading EBITDA ratio of 3.6 times, up from 2.2 times.
Saga share price pressure
That level of debt is putting pressure on the Saga share price, for sure. But I’m not so concerned for several reasons. One is that the big drop in earnings is only a short-term thing caused by the pandemic – and we’re almost sure to see earnings recovering in the next few years.
Short-term survival is crucial, mind. And though that’s a high leverage multiple, it’s still well below the firm’s covenant level of 4.75 times. And finally, of course, there’s the prospect of all the cash being raised by the new equity issue.
As promised, the process kicked off on the same day, and aims to raise approximately £150m in gross proceeds. It will comprise placings of new Saga shares, plus an open offer. I’d still be wary over the chances of success, except for one thing. Former CEO Sir Roger De Haan, son of the founder, is investing up to £100m himself.
Confident return
The firm says that reflects “his belief in the underlying strength of the Saga brand and business and his confidence in the new strategy under the strengthened management team“. Whichever way you look at it, it appears Sir Roger wants back in again real bad.
Whether that commitment, or the optimism, will carry over to a resurgence of Saga’s business remains to be seen. After all, the company wasn’t exactly proving a roaring success for investors even before the devastating virus arrived. Over the past five years, the Saga share price is down more than 90%. And the 2020 pandemic crash looks almost insignificant compared to earlier slumps.
Positive outlook?
Still, saying that, I think there’s a more positive long-term outlook for Saga now than for years. And while it pays to be wary when an ex-boss wants to come back and help steer the ship once more, in this case I’m buoyed by the prospect of Sir Roger’s return.
It’s risky, but I think Saga is one of the more promising recovery candidates out there now. I’d buy.
