UBS downgrades Saga to 'neutral' following profit warning
Saga
110.60p
13:04 26/04/24
Analysts at UBS downgraded over-50s focussed outfit Saga to 'neutral' from their previous 'buy' stance on Monday, following the group's second profit warning in as many years.
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The week before, Saga cut its dividend after swinging to a pre-tax loss of £134.6m in the year ended 31 January, compared to the £180.9m pre-tax profit recorded a year earlier. Revenue fell 2.2% to £842m, due to the broking business' weak performance.
With Saga having removed its medium-term guidance for earnings growth, shelving its dividend and warning on profits twice since its IPO, UBS said management's track record on execution was "limited", leading it to believe that an 'execution discount' was now warranted on the shares.
They conceded that growth in travel earnings had helped support the group's revised earnings target, but said the broking unit was still facing near-term headwinds while noting the execution risks around Saga's new strategy.
In terms of the headwinds, UBS reckoned Saga’s intention to launch new home and motor policies with three-year fixed pricing would create risks around the broking unit's capital requirements.
The analysts also highlighted headwinds to earnings in the form of Saga's move to change its renewal practices in response to an investigation undertaken by the Financial Conduct Authority into how insurance firms price home and motor policies.
"Our 'buy' rating was predicated on Saga's higher multiple travel and broking units offsetting normalising reserve releases, driving a re-rating. With Saga's FY18 results, the company reset expectations around broking profitability, highlighting unsustainable margins, with outer year profit expectations declining ~40%. Saga, in turn, announced a new strategy, renegotiated covenants with the banks and cut the dividend.
"We find further execution risks around the new strategy, which we expect to weigh on the PE multiple. We cut 2019/20-23/24E EPS 38-44%, lower our PT to 65p, downgrading to 'neutral'."