Get aboard as Saga sets sail for its stock market float
The investment column that makes the most of your money
OVER-50s travel and insurance group Saga is one of the best-known brands in Britain and its flotation is one of the most eagerly awaited stock market events of the year.
Would-be investors have until midnight on Tuesday to apply. But are the shares a bargain or is Saga simply riding the flotation bandwagon?
In common with almost every company floating on the market, Saga has set a price range for its shares, in this case 185p to 245p. The range is wide and the price will not be set until Friday, three days after the application deadline.
While this is not terribly helpful to investors, there is little doubt that Saga’s management, bankers and private equity owners would like this flotation to be a success. The company lives and dies by the strength of its brand and a soggy stock market debut could have an unwelcome effect on its reputation.
Recent Saga customers will also receive one free share for every 20 they buy, as long as they hold their stock for a year – and management will be mindful that this offer is worthwhile only if the share price is stable or rises over the 12 months.
Further ahead, Saga’s chairman, aptly named Andrew Goodsell, is keen to increase customer numbers, improve profits and deliver a progressive dividend to shareholders.
His targets are ambitious but realistic. The over-50s are the fastest growing part of the UK population and the richest, with about twothirds of the country’s wealth.
Within this group, Saga has about 2.2 million customers, most of whom buy more than one type of product from the business. Over time the company, which began in the 1950s as a family-owned holiday business catering for the over-50s, has built an immense database so it now has information on more than ten million older people in the UK.
This knowledge has helped Saga grow into a business that will be valued at between £2 billion and £2.5billion.
While many people associate the company primarily with cruises and package holidays, it makes most of its money from insurance, largely home and motor, but also private medical and even pet cover. In these divisions, Saga has specialist partners who are keen to work with the business and benefit from its database of older people, most of whom are comfortably off and live more cautious lifestyles than younger generations.
As these firms gain ready access to millions of potential customers, they are prepared to offer them lower rates. They make money because their marketing costs are low; Saga customers can buy competitively priced products and Saga makes a turn in the middle.
Goodsell has expanded the company into areas such as credit cards, savings and legal services, and in recent years Saga has also moved into healthcare, having taken over two major home care providers, Nestor Healthcare and Allied Healthcare.
The group has spent the past 18 months integrating these businesses and making them more efficient. It is the leading provider of home care in Britain and last month it won its largest contract to date, providing a third of all Kent County Council’s home care requirements.
The care industry has come under sustained criticism over recent years, but Saga is hoping to bring new standards to the sector and so grab market share from smaller, less efficient rivals.
Goodsell also intends to move increasingly into private care, which is more profitable and more bespoke. In the year to January 2014, Saga made underlying profits of £222million and analysts expect that to rise to at least £300million over the next three years.
A dividend of about 4.5p will be paid in 2015, implying an initial yield of just over 2 per cent.
If all goes according to plan, profit growth could be considerably stronger and long-term dividend payments accordingly higher.
The group recently recruited a new chief executive, Lance Batchelor, the former boss of Domino’s Pizza. Batchelor and Goodsell are keen to move into new businesses, where the Saga brand will resonate with customers, such as retirement villages and wealth management – looking after pensions and investments.
Saga is owned by three private equity firms, which will be raising £550million by selling 25 per cent to 50 per cent of the company, depending on the eventual flotation price. They will have to retain their shares for at least six months, which provides some short-term reassurance for prospective investors.
More importantly, the Saga name has been carefully cultivated over 60 years and the management is determined to maintain the group’s reputation.
Travel, insurance and home care are tough sectors, but Saga is forecast to deliver annual growth of at least 7 per cent for the next three years and if it can expand successfully into other sectors, the business should do even better.
Midas verdict: When private equity firms make for the exit, new investors may wonder if this is the right time to buy shares. In Saga’s case, the answer is yes, as the stock should deliver steady growth. But this is unlikely to be a Royal Mailstyle bonanza, so don’t bet the farm on this business.