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Saga share price: what to expect from annual earnings

The year 2018 saw Saga shares fall to a record low, but with the share price having rallied off the lows and a better technical outlook now prevailing, there seem to be a few reasons to be more optimistic about the shares.

When is Saga’s earnings date?

Saga publishes its earnings for its financial year (FY) on 4 April 2019, covering the 12-month period to the 31 January 2019.

Saga results preview: what does the City expect?

Saga is expected to report headline earnings per share of 13.1p, up 4% over the year, but revenues are expected to fall 1.5% to £847 million. Earnings steadily grew until 2017, but fell in FY 2018 and indeed are expected to fall in FY 2020 as well as FY 2019.

While the firm’s travel division remains a strong performer, the outlook for Saga’s business overall does not seem as encouraging. The profit warning of late 2017 continues to hang over the group, and sentiment remains weak despite the push to boost volumes. The chief executive officer (CEO), Lance Batchelor, has driven Saga to concentrate on new business at the expense of margins, a different approach to most insurance firms which choose to concentrate on profits rather than just the volume of new business. Cost cutting has offset some of the extra expense, but pre-tax profits have still come under pressure.

Insurance is a business dominated by loyalty. Despite the push for consumers to become more aware of the advantages conveyed by switching providers, plenty of people still stick with the same policies. Saga’s position as a key provider of insurance to the over-50s provides it with a degree of branding and identification that other firms envy.

The worry for investors is that a run of poor performance will begin to hit earnings in a more substantial fashion, resulting in a lower dividend cover for the payout and thus an increasing temptation to cut back on the dividend. Cash generation, however, is still strong and net debt continues to fall, which has helped sustain the dividend in the past two years. Fortunately, the firm has seen a notable pickup in cruise bookings, with more than half of the space available on the new cruises already booked, despite the fact that one ship has only just entered service and another is not to enter the market until the summer of 2020.

At 8.7 times forward earnings, the shares are relatively cheaply-valued, below the two-year average of 10.6. The valuation stayed around 12.7 times during 2017 but the general market sell-off and a late-2017 profit warning meant that the forward price-to-earnings (P/E) ratio fell dramatically to 8.6, one-standard deviation below the mean. Brief rallies in the share price saw the P/E ratio hit the 10.6 mean or get close to it twice during 2018, but by the end of the year it had tumbled to a low of 7.4 times forward earnings.

As an insurance firm, one of Saga’s main attractions has been its dividend yield. This has surged from below 2.5% in the middle of 2015, when the firm it created its initial public offering (IPO), to a high of almost 9% during the sell-off of late 2018. Such a high yielding share is undoubtedly an attraction for income hunters, but the risk of such a high yield, well above the FTSE 250 3.1%, is that a reduction in the payout may be forthcoming. As is frequently pointed out, dividends are an important element of any investment strategy, but a high dividend yield alone is not a reason to buy a company’s shares. Instead, the overall position should be considered, and it is true that the relatively undemanding P/E ratio of 8.7 helps offset the high yield, while steady cash flows and rising volumes help to make the shares more attractive.

How to trade Saga’s annual earnings

Saga sees a 3.05% move on average on its results day, according to Bloomberg data. The company is not heavily covered by analysts, with only five broker ratings. Of these, three are ‘buy’, one is ‘hold’ and one is ‘sell’. The median target price is 155p, a 38% premium to the current share price.

Saga share price: technical analysis

The year 2018 was tough for Saga shares. After a profit warning in December 2017, the shares fell 15%, but the rout did not stop until around 40% was wiped off the value of the company. The shares hit a low in January of 101p, but after consolidating a rally to 128p took place by the beginning of May. Further gains into October took the price back to 138p, but then it fell in the general market turmoil, reaching a low of 99.8p by the beginning of December 2018.

Crucially, the share price then rallied and broke downtrend resistance from the August 2017 highs. While it has dropped back since then, price action created a higher low around 110p, suggesting that a push back to 127p and then perhaps 138p will develop. A close below 110p targets the 99.8p low once more.

Saga hopes for long-term recovery

It has been a tough couple of years for Saga, but perhaps things are looking better. In any case, with a low valuation and a more interesting technical outlook, investors are starting to look more optimistically at the company. There is still a lot to be done, but the shares seem to offer better value now than they did back in 2017.

This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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