Saga boss Lance Batchelor wheels out a familiar bar chart every time the over-50s insurance and travel company reports profits.
It depicts a falling red line, representing Saga’s shrinking debt, set against rising profits. The contrast with its former stablemate, the AA, is stark — and probably intentional. Ever since Saga split from the breakdown company in 2014, when the private equity-owned financial services behemoth Acromas was broken up, their fortunes have diverged.
On Wednesday, shares in the AA crashed almost 30% as it slashed its dividend and warned on profits.
It gave no clues about how it plans to cut its debt pile of about £2.8bn, which has stayed stubbornly high since floating.
Saga has been living more conservatively since floating. Its debt has dropped from about £700m to £460m, giving it a leverage ratio of about 1.8 times earnings — versus almost 8 times at the AA.
Yet Batchelor may not be able to rely on his trusty bar chart much longer. Late last year he stunned investors with a profit warning of his own, warning of higher costs and difficulties with its shift to a new strategy. The shares crashed 25% and have yet to recover. They closed last week at 119.2p — 36% below the float price — valuing Saga at £1.3bn.
Saga will now be accounting for revenues more conservatively, warned the former Domino’s Pizza boss, and it also faces a £10m hit from extra marketing costs.
Ever since being freed from the clutches of the private equity giants CVC, Charterhouse and Permira, Saga has been trying to modernise and shift away from capital-intensive underwriting, moving to capital-light broking for its motor insurance customers.
This is proving much harder than it expected. Competition is intensifying in the over-50s segment, and Saga has belatedly realised that it must advertise heavily to win new customers.
Batchelor is pinning his hopes on a new membership scheme to lure customers and persuade existing ones to spend more with the company. But it will take more than “money-can’t-buy” tickets to see The Gruffalo’s Child to win over this increasingly savvy generation — and persuade them to stick with it.
Saga is also pumping resources into a new cruise ship, Spirit of Discovery, but the vessel does not enter service until summer 2019.
Cost cuts will help, but Saga’s journey to a more profitable future will require a lot of patience. Avoid.
