Later Life Travel Demand And Capital Light Insurance Model Will Support Long Term Prospects

Catalysts

About Saga

Saga is a specialist provider of travel, insurance and money products tailored to people aged over 50 in the U.K.

What are the underlying business or industry changes driving this perspective?

• Demographic growth in the over 50, time rich and affluent segment, combined with Saga’s trusted brand and unique customer insight, supports sustained demand for differentiated travel and insurance propositions, underpinning long term revenue growth.
• Structural expansion of experiential and premium later life travel, with strong repeat bookings, high customer satisfaction and rising per diems on ocean and river cruises, is improving pricing power and load factors, which should support higher revenues and operating margins.
• Shift to a less complex, lower risk and capital light insurance model through the Ageas partnership and disposal of underwriting is expected to make earnings more stable, reduce volatility and improve cash conversion, supporting net margin resilience and predictable earnings.
• Growing importance of digital engagement and owned media, evidenced by rising web traffic and strong newsletter open rates, increases low cost, high impact marketing reach, which should lower customer acquisition costs and enhance revenue growth and profitability over time.
• Industry wide appetite for specialist partnerships, such as the NatWest Boxed deal in savings and further potential collaborations across adjacent services, creates scalable new product channels that can diversify income streams and gradually lift revenue and earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Saga's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -9.2% today to 14.8% in 3 years time.
• Analysts expect earnings to reach £101.9 million (and earnings per share of £0.43) by about December 2028, up from £-57.2 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 4.7x on those 2028 earnings, up from -7.4x today. This future PE is lower than the current PE for the GB Insurance industry at 11.1x.
• Analysts expect the number of shares outstanding to decline by 1.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.97%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company’s clear strategic focus on driving long term profit growth, including a GBP 100 million underlying profit target and leverage of less than 2 times by 2030, signals management and investors are anchoring on a materially higher earnings base, which increases the probability of a rerating in the valuation and a higher share price as earnings expand and net margins improve.
• Strong structural demand for premium later life travel, evidenced by high and rising load factors, increasing per diems and expansion of the river cruise fleet, suggests sustained volume and pricing power that could push revenues and operating margins higher than today, which would typically support a higher equity value rather than a flat share price.
• The shift to a lower risk, capital light insurance model via the Ageas partnership and exit from underwriting risk introduces more stable, predictable commission income with reduced earnings volatility, which can improve investor confidence, lower perceived risk and support higher valuation multiples on future earnings.
• Ongoing deleveraging, with net debt already reduced and all major debt fixed at current rates, creates a visible path to a much stronger balance sheet. As leverage falls, equity holders capture a larger share of growing profits, which is likely to drive an upward move in the share price as free cash flow and net income improve.
• Deepening customer engagement through publishing, digital channels, the money partnership with NatWest and ancillary services such as the wine club and Saga Connections increases cross sell potential and lifetime value of customers. This can accelerate top line growth and scale benefits, leading to structurally higher earnings and net margins over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £2.72 for Saga based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £4.1, and the most bearish reporting a price target of just £1.2.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be £686.9 million, earnings will come to £101.9 million, and it would be trading on a PE ratio of 4.7x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of £2.93, the analyst price target of £2.72 is 7.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.