Is it the time?
“Daddy, daddy, daddy; what actually is time?”
“Well son, it’s that thing that God made to stop things happening all together.”
I have a feeling that I may have got that from the late great Terry Pratchett. Whatever, it is an exchange that tickles me, whilst also reminding that answers to questions are often singularly unhelpful unless you frame your question very carefully.
Anyway, I just googled “what is time” and the first answer was “the indefinite continued progress of existence and events in the past, present, and future regarded as a whole.” I think I prefer my answer!
Moving swiftly on, “time” is probably not the appropriate tagline for this article. It is more about “age”. I am writing about Saga [LON:SAGA].
An aged icon.
Saga is an iconic British brand. It is 69 years old, so more venerable than many of its customers.
It is famous for providing holiday experiences for the over-50s. There was a time when anyone having a birthday starting with “4” (that did not involve jelly & ice-cream) would have some wag telling them “never mind you’ll soon be able to book a Saga holiday.”
It is possibly less well known these days and in fact whilst it is still focused on the over-50s and still offers holidays, it is now more of an insurer than a holiday firm.
The private era.
The company has spent most of its life in private hands. It was run by the founder, Sidney de Haan, for 31 years and for a further 20 years by his son Roger de Haan.
De Haan Junior sold the company to a private equity-backed management buyout in 2004 for £1.35 billion. The company was then merged with the AA [LON:AA.] before they were both separately listed a decade later.
Saga’s IPO was at £1.85 per share (and I believe over-subscribed), valuing the company at £2.1Bn. That is a fairly modest return for the PE guys, though I don’t know how much cash was sucked out over the years. It listed with £700m of debt.
The listed era
I almost never invest in IPOs (and therefore rarely pay attention) as they routinely let investors down. In the overall scheme of things, SAGA didn’t follow the oft-trodden path of IPOs.
Three years on from listing, by May 2017, the share-price was up fractionally and there had been decent dividends in the meantime.
That was about as good as it got for shareholders (so far).
The failure of Monarch Airlines (involved in the Saga travel business) in September 2017 caused one-off losses and reduced earnings guidance for FY 2018. This was coupled with “more challenging trading in insurance broking” and the share price nearly halved over the next few months.
The pressures on insurance margins continued and when in April 2019 the full-year results statement included substantial goodwill writedowns reflecting lower expected forward profits, the share-price plummeted by a further 50%.
Later in 2019, they took delivery of the first of two custom built cruise ships to support their holiday offering. With the benefit of a huge slice of hindsight that was particularly bad timing.
In December 2019 Euan Sutherland was announced at the new CEO, joining in January. Shortly thereafter he shelled out £100,000 on company shares at 39p. With the same dollop of hindsight that was particularly bad timing; within a month he had lost about 2/3rd on that investment.
Coronavirus had arrived in the market’s consciousness. Aside from the general market gloom, it was clearly no time to be in the travel business nor to own cruise-ships. Whilst Saga lost around 67% of its market cap in short order, Carnival [CCL] lost 85%!
We are almost there (here).
It was around this time that my interest in Saga was piqued. How did it look against my three coronavirus investment tests?
Beaten up share price? Certainly! Down 2/3rd on coronavirus concerns at around 14p. Even in the difficult FY 2019, they had made 4p underlying EPS and prior to that they had been achieving around 12p.
The extent to which the company’s markets would bounce back. I would only give a qualified pass here; whilst the insurance business should not be greatly impacted, any return of demand for holidays and particularly cruises, would seem to me to be too far into the distance.
Ability to survive any cashflow strains without fund-raising. Here I was less certain. Despite having a high level of debt, they did seem to have a reasonable amount of headroom; however, it was pretty much unknowable what their Covid cash costs might be and particularly how much would the travel business have to pay back in customer deposits and pre-payments.
This was too risky for me.
Right up to date.
Further developments have swung me and I now hold a small position.
Subject to approval by shareholders, the company has raised £140m net (£150m gross) by issuing new shares – effectively at 14p net (15p gross) – overall at a premium to the pre-fund-raising price.
A substantial block of this comes from former boss Sir Roger De Haan (knighted in 2014 for his education and charity work).
De Haan put in £60m at 27 pence per share (yes you did read that right) and between £15-40m (dependent on scale back) at 12 pence – the offer price. This doubles the shares in issue. Being able to do this at just above par lessens the pain and I think the much-improved balance sheet is ample compensation.
Results and Trading update.
At the same time, we got the interim results to July 2020 and I find several sources of comfort here.
Insurance has performed well and returned to growth, after they previously indicated that they were moving to focus more on value than price.
That phrase always makes me smile, being the antithesis of retailers “investing in price”. The cynic in me reads it as “we are going to jack up the price but appear more cuddly”. It is probably a shrewd move.
Whilst for some, the decision of what insurance to buy is almost all about price, I suspect that Saga’s demographic may be more prepared to pay a little more for the comfort that things will be easy if a claim is needed. Saga have for example automatically included overseas treatment or repatriation for Covid in its travel policies. Many people would I am sure pay a premium for that, so to get it “for free” creates that sense of “value”.
Travel was of course a bit of a train wreck, generating a loss before tax (and central costs) of £43.6m compared with prior year profit of £6.1m. There is though encouraging news:
- Over 65% of customers have retained (i.e. rolled forward) their cruise bookings. That suggests cruise demand might rebound more rapidly that I assumed.
- They have been able to defer £32.3m of the payments on the new ships (to be repaid over the following four years)
- Cash burn for the travel business to be between £6-8m during H2. So, worst case that is £48m cash-burn which compares favourably to the £140m they have just raised.
- Their base case to resume Cruise operations from November, seems increasingly optimistic as ever day passes, but they have stressed tested less optimistic cases.
It would be madness to describe these results as “good”, but they provide clarity and are certainly less bad than might have been feared.
“One day a king will come, and the sword will rise again.”
As well as pumping in substantial capital at a premium, Sir Roger is to return to the helm as non-executive chair. It is easy to romanticise this as being akin to the promised return of King Arthur, to put things right, when the Kingdom (or in this case company) is at its greatest need.
Certainly Sir Roger knows a very great deal about the business and perhaps he does know how to make Saga great again.
On the other hand, perhaps he is following his heart rather than his head in wanting to try to help save the family business. He hasn’t been involved directly with the business for 16 years (as far as I am aware) and in that time the internet has made it much easier for competitors to put together customised offerings.
I certainly do not see Sir Roger’s involvement as a negative, but I think it would be unwise to build an investment case around it as a positive.
As noted above, I have decided to take a small position in the company, as the metrics around my three Covid-crisis tests have improved and become clearer. It is not the kind of “banker” that I have really being looking for; it is still quite high risk, but in this case, I believe those higher risks are accompanied by higher potential reward.
So, quite a tenuous position, back to the question of time; have I bought too soon?
I increasingly look, these days, for situations where both company performance and investor sentiment are starting to move in the right direction, as opposed to simply having the future potential to do so. Neither of those are obviously the case here, so in terms of momentum, I am effectively banking on the fund-raising providing a catalyst once the dust settles.
If this does not transpire, then I suspect it could be a long wait and I might even consider selling.
Looking back over the recent past recounted above, it seems to me that after each lurch down in the share price you could make a credible case that the share-price could/should “revert to mean” in time. That has not happened to date, which is a useful reminder that just because something bad has happened does not mean that something else bad cannot happen!
If you ever find yourself thinking “surely things cannot get any worse”, rest assured, they surely can.
Just a quick footnote for anyone reading this in the future and wrongly applauding my investment genius. As part of the fundraise there will also be a 15 to 1 share consolidation, so all of the share-prices mention above should be multiplied by 15 to keep in context.