Cube Report (14 June 2021) – Saga is ready to set sail

Cube Report (14 June 2021) – Saga is ready to set sail

Good morning, it’s Roland here with today’s Cube Report.

It looks like the 21 June date for lifting Covid-19 restrictions in England will be delayed by perhaps at least two weeks. How will this affect the stock market? Not much, I suspect. The news isn’t a surprise, and for most businesses I would guess that a pause at the current state is preferable to the risk of more serious restrictions in the future.

One sector whose plans might be affected are cruise ship operators, including Saga. As it happens, we have a trading update from Saga today, so I’ll start with that. I also want to take at look at (yet another) bullish update from a recruitment group.

  • Saga – the over-50s insurance and travel specialist hopes to start cruising later this month
  • SThree – this recruitment group says performance was ahead of expectations in Q2

Saga

  • Stock data should display here.
Market cap £575m
RNS AGM trading update
Writer disclosure No position

Saga’s share price has now tripled from the low of 119p seen after the company’s £150m fundraising last September. That may not be much consolation for long-term holders, who’ve been heavily diluted and are still facing a five-year loss of 85%. But Saga’s strong recovery does seem to be a strong endorsement of chairman’s Sir Roger de Haan’s backing of the firm. Broadly speaking, this is a view I share.

What can we learn about progress at Saga from today’s AGM update, which covers the period from 1 February to 13 June.

Insurance: In both 2018 and 2019, Saga generated around 90% of its profits from insurance. So this is a key part of the business, despite the excitement around the firm’s new cruise ships.

Current trading is pretty much as I’d expect, given wider market trends. Motor and home policy sales are down by around 2% on the same period last year, reflecting competitive market conditions and premium deflation.

However, lockdown has meant a sharp fall in motor claims, which is expected to improve the half-year loss ratio by 5%. I’d guess this is likely to normalise during the second half of the year.

The company’s initiatives to build customer loyalty seem to be making steady progress. Customer retention was unchanged at 80%, while sales of three-year fixed price home and motor policies accounted for 43% of total sales, up from 38% during the same period last year.

Saga says it’s making “good progress” with preparations for the new FCA rules which will ban price walking — the practice of increasing prices for loyal renewal customers to subsidise cheaper rates for new customers.

Travel: Saga hopes to start restart its travel business from 27 June, “subject to government restrictions”. It’s not clear to me whether delays to England’s unlocking are likely to impact Saga’s plans.

A lot seems to rest on the success of the company’s two brand-new cruise ships, the Spirit of Discovery and Spirit of Adventure. 

Fortunately, the famed loyalty and repeat purchase patterns of cruise customers appear to be intact. The company says that 73% of cancelled cruise bookings have been retained and that 77% of 2021/22 cruise capacity is booked. Next year’s bookings are running at 48% of capacity.

Tour bookings are lagging behind at 60% and 27% of target levels — unsurprising, given the difficulty of overseas travel at present.

Cash burn in the travel business so far this year is said to be at the lower end of guidance of £7m-£9m per month. I’d guess that means around £35m-£40m YTD. Not insignificant, but I think it should be manageable.

Finances: Net debt to EBITDA of 2.9x (excluding cruise ship debt) looks high — and I think it is. But it’s well under the firm’s temporary covenant limit of 4.75x and appears to be in line with expectations. If the travel business can restart, EBTIDA should rise quickly, supporting further deleveraging.

However, I think it’s worth pointing out that total net debt (including c.£515m of cruise ship debt) is £757m. The cruise ship debt is currently benefiting from payment holidays until March 2022. But Saga won’t be able to pay a dividend until it has cleared £51.8m of  deferred principal repayments. Current broker forecasts suggest a dividend of 11.5p per share in the 2023/24 financial year.

My view

Today’s update appears to be pretty much in line with expectations.

I have a broadly positive view on the outlook for Saga, which is unchanged after today. At current levels I think the stock could still offer value if the new cruise ships prove as successful as hoped. Broker forecasts put the stock on just seven times earnings for 2022/23, which seems affordable.

However, I think it’s worth remembering that the company isn’t able to pay dividends yet and remains quite highly geared. I suspect that Saga’s share price growth could slow for a while until it becomes clear that the firm’s plans to generate cash and de-lever are delivering results


SThree

  • Stock data should display here.
Market cap £621m
RNS Half-year trading update
Writer disclosure No position

SThree is a global recruitment agency specialising in in STEM sectors — Science, Technology, Engineering and Mathematics.

Today’s half-year trading update is ahead of expectations, but the good news is already in the price because the company issued an upgrade statement last Thursday. As a result, SThree shares ended last week up by c.10%, but are unchanged at the time of writing today.

The company says its seeing high demand in Life Sciences and Technology — perhaps not surprising in the context of the last year. Here are a few highlights from today’s statement:

  • Q2 net fees +22% vs FY20, +8% vs FY19
  • Group net fees for H1 +10% vs FY20, +3% vs FY19
  • Contractor order book +33% YoY
  • Largest markets are Germany (33%) and USA (25%)
  • Net cash of c£48m at 31 May 2021 (FY20 £31m)
  • Reinstating forward guidance

Earnings forecasts: From what I can see, consensus forecasts have not yet been updated following last week’s upgrade. However, if I add 10% to the previous consensus, I get earnings of c.23p per share in 2020/21. That would put the stock on a forecast P/E of 20 for the year ending 30 November.

My view

SThree has historically generated high returns of capital — even last year, the company managed ROCE of 21%. So I think a reasonably strong valuation can be justified for this cash-generative business.

However, I can see a couple of short-term factors that could slow earnings growth during the second half of this year. SThree says that many of its contractors have accumulated a backlog of unused annual leave, which might weight on fees for a short time. Internally, management say that productivity increases over the last year have led to an increase in sales per head, but this benefit is now expected to “normalise to some extent”.

Taking a longer view, I’d note that SThree’s share price is at a post-2007 high, even though pre-tax profit isn’t expected to return to 2019 levels until 2023.

On balance, my view is that the share price is probably up with events. I wouldn’t sell STEM stock if I held the shares today, but I’d probably wait for the next market dip to consider buying.

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