The Saga (LSE: SAGA) price chart over the past 12 months is not pretty, with two-thirds knocked off the value of the company.
Results back in April revealed a plunge to a pre-tax loss of £134.6m, after previous healthy profits. It was, it seems, all down to the firm’s marketing strategy targeting oldies going off the boil, and it led to a big cut to the dividend.
The immediate result was a 35% fall in the share price on the day. I was surprised and thought it overdone, but there was no quick rebound, and the shares just kept on sliding.
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Reboot
When a company needs to rebuild the whole approach to its business, the future becomes very opaque and it’s hard for investors to put any sort of valuation of things. Still, at least the year’s loss was largely down to one-off charges — and a lot of that was caused by impairments related to Saga’s insurance business.
Beneath it all, Saga didn’t look to me like it was on the verge of any serious financial difficulty. It certainly wasn’t close to the dramatic situation surrounding fellow holiday firm Thomas Cook, but that firm’s troubles must surely have had a negative effect on Saga sentiment.
Thomas Cook shareholders were seeing their investment dwindle in value, eventually being almost completely diluted out of it by the Fosun rescue package, and are now out of pocket to the tune of 93% over the last 12 months. Being in a time of tightened belts and squeezed discretionary spending didn’t help, and fears that the sector contagion could spread to Saga were by no means irrational.
Activism
Wind forward a few months, and the low valuation of Saga shares attracted the attention of activist hedge fund Elliott Capital Advisors, which has been building up a stake. What Elliot might want to do is an open question right now, but I wouldn’t bet against an attempt to separate Saga’s holiday and insurance businesses, possibly trying to find an outright buyer for the latter.
The result was an encouraging upwards trend in the share price, with a 60% gain from June’s low to a high in late July.
Since then, however, the price has started to drift back down again, with the month of August showing a 7.6% fall. As I write today, the shares have shed 18% of July’s transient high, but why?
I can’t help feeling that the absence of any further news of Elliott Capital Advisors has dampened the initial enthusiasm, and the finalisation of the catastrophic Thomas Cook rescue (catastrophic for pre-existing shareholders, that is) must have refocused minds on the risk they could actually be facing in this sector.
Time to buy?
But I think the bears just might have got it wrong.
There’s got to be some restructuring, and the mere presence of an activist hedge fund on the shareholders register must surely add to the pressure on Saga’s board to get things moving quickly.
And with the depressed shares on a forward P/E of only 5.6 (and even the slashed dividend set to yield 9.3%), I think this is an oversold situation just ripe for the opportunistic picking. I don’t do recovery situations myself, but Saga could be a great target for those who do.
