For most stocks, a 23% rise in a month would be cause for celebration. For struggling holiday firm Saga (LSE: SAGA), however, after its 78% share price crash over the past two years, it’s hard to see any more than, perhaps, a little cautious optimism.
The downward turn since the end of the month adds a bit of gloom to the proceedings too, with Saga shares dropping 12% so far in October. The price is currently 35% up on its 52-week low, but you’d have done very well to get your timing good enough to profit from that.
The final act in the Thomas Cook drama unfolded towards the end of the month too, and I’m sure that must have been a contributing factor behind the renewed bearish sentiment of recent weeks.
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Results
The big boost to the shares during the month came from first-half results, released on 19 September, with the price up 16% on the day — short-lived though that turned out to be. The results, though, were not exactly sparkling. Underlying pre-tax profit for the six months to 31 July fell 51% to £52.8m, with available operating cash flow suffering a 72% crunch to just £24.9m.
Net debt, excluding the Cruise division, rose only a little to £397.9m, but with earnings falling, the firm’s net-debt-to-trading-EBITDA ratio (again excluding Cruise) climbed to 2.2 times (from 1.8 times a year previously).
I rate anything above around 1.5 times as a concern, and I find it especially worrying for a company in a very competitive market that’s suffering from tough economic conditions. And once we include Cruise, total net debt balloons to £642.9m and that debt-to-EBITDA multiple zooms up to 3.6 times.
Dividends
The interim dividend was slashed from 3p per share to 1.3p, but I always suck my teeth and shake my head whenever I see a company struggling to turn around under a big debt pile paying any dividend at all. In my view, cash conservation should be the order of the day and should be a higher priority than many struggling companies appear to be willing to consider. For any stocks I own, I’ll gladly sacrifice dividends in the short term if it benefits the long-term health of the company — I’m far more interested in the 2029 dividend than the 2019 dividend.
Insurance is a key part of Saga’s business, and CEO Lance Batchelor reported good progress, saying: “The sales of our 3-year fixed price insurance are encouraging, and a higher proportion of customers are coming to us direct.” So that’s something.
Cheap now?
Now, the share price valuation. Forecasts, even though they include a 40% EPS fall (which is a little better than the interim figure), put the shares on a lowly P/E multiple of only six.
That raises a dilemma for investors — pile in on the hope of a share price recovery over the next year or two, or get out our bargepoles. The answer for me is easy. These days I simply won’t invest in a recovery situation until I see the crisis is past and the company is in good balance sheet health. And I certainly wouldn’t invest in any company with Saga’s level of debt.
No, it’s the big stick for fending off boats for me.
