Saga shares sink as JPMorgan warns of margin pressure

Shares in over-50s specialist Saga sank on Friday as JPMorgan Cazenove cut its stance on the stock to 'underweight' from 'neutral' and reduced the price target to 120p from 140p, arguing that competitive markets are adding to margin pressure and highlighting a weak balance sheet.

JPM said Saga faces margin pressure across its broking business as competitive conditions continue to weigh on industry profitability.

"Several of the larger UK motor players have reported in the past week and all have described industry pricing that is failing to keep pace with claims inflation. Given that Saga is seeking to return to policy growth after many years of declines, this is an unhelpful backdrop, we believe, while travel may also be seeing pressure due to Brexit uncertainty."

JPM noted that Saga is taking on a significant amount of new debt in the next two years - around £540m - to fund its two new cruise ships and said that remaining below 3.0x at the leverage peak looks increasingly challenging.

"Thus, we see little scope for a re-rating currently, as any further pressure could raise the question of dividend sustainability."

JPM cut its FY20 adjusted earnings per share estimate to 12.2p from 12.6p and its FY20 estimate to 12.3p from 13p. This leaves it 2% and 4% below consensus, respectively.

At 1315 GMT, the shares were down 9.8% to 110.80p.