Saga
It’s hard to avoid the conclusion that investors were sold a bit of a pup when they bought into the Saga flotation four years ago. They were told of all the mouthwatering opportunities to extend the over-50s brand into new areas, from wealth management to domiciliary care and home building.
Now we know it was after all just a dull, low-growth insurer masquerading as something more exciting, albeit with a small and successful cruising business on the side. Even after yesterday’s 6 per cent bump to 123¾p, the shares are still way down on the 185p float price.
Institutions saw through the blarney at the time. They largely shunned the float, forcing the private equity backed sellers to price at the very bottom of the range. Retail investors were not so lucky; 200,000 piled in, making it one of the most popular floats of recent times.
Saga toddled along not making much share price progress until December, when it issued a nasty profit warning. Years of underinvestment had led to the active customer base stagnating at about 2 million for ten years; it was time to step up investment in the brand and that would hit profits for the next year or two.
Lance Batchelor, chief executive, has long since sworn off those ambitious diversification dreams and foresees very nice returns from largely sticking to the knitting of insurance and cruising. And his efforts to start wooing new customers show signs of success.
Yesterday’s full-year results don’t add that much to what we already knew. Pre-tax profits, as foreshadowed, fell 8 per cent to £179 million. After stripping out some inconvenient costs, Saga managed to claim its underlying profits were growing by 1.4 per cent.
There were a few nasties in there: £3.5 million of loan notes accepted in part payment for its disposal of Allied Heathcare, the domiciliary care business, have been written off. Saga also seems to have been hit by derivative losses on hedges in the foreign exchange markets.
The core motor and insurance business had a patchy year. Insurance underwriting, which Saga is attempting to pull back from because of its heavy capital burden, delivered strong results. Motor broking was fine. Home broking was not: premiums are flat and the market is extremely competitive.
Batchelor’s big bet is now on cruising. Saga takes delivery of two new ships, costing £300 million apiece, in 2019 and 2020. These are relative tiddlers compared with some of the floating cities recently launched by rivals, but they are capable of moving the dial for Saga, each generating about £40 million to £50 million in cash per year.
Saga scores very high customer satisfaction rates for cruises and already the first of the two ships, Spirit of Discovery, has secured bookings for 50 per cent of its cruises in its first nine months from June next year.
But this is still undeniably a bit of a voyage of uncertainty. Having made sterling progress in paying down debts and getting leverage down to less precarious levels over the past four years, Saga is now dramatically having to gear up again. The chart above shows its own expectations for leverage over the next five years. Fortunately, the borrowing is all on fixed rates. The extra debt, though, undeniably makes the company more vulnerable to capsize.
In theory, the dividend, which was raised by 6 per cent to 9p for the full year, should keep investors happy for the couple of years before those cruise ships start generating serious cash. The shares now yield 7 per cent, after all. And management is confident the strong cash generation for insurance will be enough to sustain it.
ADVICE Hold
WHY The ships investment raises the risk level, but the generous yield should stop the shares sinking any further
Blackrock
“You should be 100 per cent in equities,” Larry Fink, the boss of Blackrock, said in an interview on CNBC yesterday, just after the company released its quarterly results. “You should always be invested in the marketplace.”
As the boss of the world’s largest money manager, he would say that, wouldn’t he? To be fair, though, his clients seem to agree. Blackrock was managing $6.3 trillion of other people’s money at the end of March, up from $5.4 trillion a year earlier and it keeps on pouring in. Yesterday Blackrock’s first-quarter profit and revenue comfortably beat analysts’ expectations.
Mr Fink said that a spike in market volatility caused by fears of a trade war, the threat of high interest rates, a sell-off in technology shares and the Republican tax reforms had prompted clients to rebalance their portfolios in the first quarter. “Volatility did change the whole dimension of the markets,” he said. “We went into January very ebullient over the tax reform. We did see a slowdown in business in February and March from the huge volumes of flows we saw in January.”
Echoing the respected investor Warren Buffett, Mr Fink added, however: “The key for investors is staying in the market.”
Blackrock reported a first-quarter profit of $1.1 billion compared with $859 million a year earlier, as revenue rose to $3.6 billion from $3.1 billion, beating estimates of $3.4 billion. Shares in Blackrock were higher by 1.4 per cent to $533.01 at the close in New York last night.
In the first quarter, long-term net inflows were $55 billion, the company said, with index-tracking funds and exchange-traded funds (ETFs) accounting for $49 billion, compared with $5.5 billion for active funds.
Notably, however, inflows into Blackrock’s iShares ETFs has slowed. They were $64.5 billion in the first quarter of last year but $34.6 billion this year. The iShares ETFs have been the strongest driver of Blackrock’s money inflows for some time, so this is a little concerning.
The drop-off in iShares inflows probably accounted for much of the shortfall in analysts’ first-quarter expectations for overall long-term net inflows of $68.6 billion.
ADVICE Hold
WHY The drop-off in net inflows for Blackrock’s iShares ETFs is a concern
