Saga (which, as I have suggested before, is a bit like Virgin, a trusted brand that theoretically could expand into any number of areas in which its over-50s clientele might be interested) is keen to tell the world about the work it does on the database collated on those customers and their needs, and the consequent prospects for cross-selling products.
Unfortunately, this doesn’t cut much ice with analysts as it is impossible to sum up in terms of hard numbers. Likewise, Saga had little to say at the halfway stage about the two nascent ventures, a healthcare operation and financial services.
This left only a couple of negatives, a £4.7 million bill for scheduled maintenance on its cruise ship the MS Saga Sapphire and a weak performance in home insurance, which seems to have taken over from motor insurance as the most difficult market to be in right now. At the trading level, interim profits barely edged ahead by £100,000 to £117.6 million.
There is not a lot anyone can do about home insurance, while the move towards an affinity model on the motors side is progressing well. This sees new business assessed by a panel of underwriters, including Saga’s own, which should assure the best outcome for the insurer.
The company has struck a deal with Munich Re that shifts more of the underwriting risk off its books and will free an estimated £50 million of capital no longer needed for regulatory reasons over the next three years. Saga’s Solvency II ratio is a very strong 196 per cent, which suggests almost £2 in hand for every pound that could be needed to settle claims.
Excess capital will go to repay debt and to investors in the form of ordinary dividends. As it is, the interim payment is up by 23 per cent to 2.7p; consensus forecasts for the year put the shares, up 1¼p at 223p and comfortably above the 185p float price in May 2014 after a post-referendum blip, on a forward yield of 3.8 per cent.
The number of people on Saga’s database and active customers are up by 3 per cent and 4 per cent, respectively, while the number of products they take hasn’t budged, which is encouraging for the future. On 16 times’ earnings, the shares look worth holding in the long term.
My advice Buy
Why Although short-term headwinds have held Saga back and home insurance is a drag, long-term prospects for the brand are brighter
Brooks Macdonald
One of the points Saga was keen to emphasise was that the Brexit vote has had little or no effect on the willingness of its core demographic to sign up for cruises. One assumes that demographic overlaps significantly with the clients of Brooks Macdonald and the indications are, after an uncertain few weeks since the referendum, they are keen to invest their money in the wealth manager again.
This is hardly surprising, given the assumption that interest rates are nailed to the floor for the appreciable future. It makes the numbers for the year to June 30 a tad academic, though. For what it is worth, market movements barely shifted the value of assets under management, while net inflows raised them by 12 per cent to £8.3 billion.
There was one negative: dithering over the next tranche of European Union regulation on financial services, MiFID II, has meant that Brooks Macdonald has had to postpone by six months the launch of its IT platform and the resulting cost savings to the start of the next financial year. Against this, the cash is piling up while further acquisition possibilities in the sector are drying up or looking expensive, so at some stage excess funds will probably have to be returned to investors.
For now the shares, off 43p at £19.40, yield a mere 2 per cent and sell on about 17 times’ earnings. That does not imply any tearing urgency to buy, but they are attractive enough in the longer term for those potential extra payouts, whenever they may happen.
My advice Hold
Why Rising cash balances should go back to investors
Diageo
Like several other global consumer goods makers, Diageo has decided that investors don’t really need quarterly updates, meaning that the market will have little to go on until the halfway figures come out in January. The annual meeting statement, though, does indicate that in core markets such as the United States, which accounts for a third of total sales, the maker of Johnnie Walker whisky and Smirnoff vodka is emerging from the doldrums.
The key to the future will be the cost savings that will deliver 100 basis points of margin growth by the 2018-19 financial year. This will mean some short-term pain: margins actually will fall in the first half because Diageo no longer regards the costs of such productivity improvements as an exceptional item but takes them straight off profits.
Margins will begin to improve again thereafter, while Diageo is set to return to a decent 5 per cent or so annual rise in organic growth. The shares had a significant post-Brexit bounce because the vast majority of profits are made outside the UK. With the shares, up 2½p at £21.83½, on above 20 times’ earnings, there does not seem to be a lot to go for.
My advice Avoid
Why Most of the good news seems to be in the price
And finally...
Eagle Eye Solutions still looks like a work in progress, but the company is moving into a more mature phase. This is an odd one. It provides the software that allows companies such as the big grocers to administer their loyalty promotions, with J Sainsbury, Asda and the Canadian Loblaws signed up. The halfway figures beat forecasts on the amount of cash in the bank and the board has been restructured, with a retail and grocery veteran slotting into the chief executive’s job. A big contract win could trigger the next move upwards.
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