It is tempting to wonder just where the future growth for Saga is coming from. The company is in a much better position than it was at the time of its flotation in May 2014. The various private equity backers are finally out. Debt fell by 15 per cent in the year to the end of January to stand at £465 million and strong cash generation will reduce it further.
The company is in a position to invest with a new cruise ship, the Spirit of Discovery, set to arrive in June 2019. It has reorganised the insurance operation, growing strongly in motor broking where the introduction of a panel of underwriters in summer 2015 has meant Saga can get the keenest of prices available in the market, while retaining the ability to provide underwriting services itself if those prices are not keen enough.
Home insurance is still competitive and the company has chosen to keep up volumes even if it means lower profits. Travel, mainly people insuring against illness and accidents abroad, is being hit by the lower pound, which is putting up rates.
The underwriting side has brought in a partner, part of Munich Re, which will limit part of the potential downside from motor accident claims. Travel is exceeding earlier targets so that these are being revised upwards, and reservations are running 8 per cent ahead of a year earlier.
Saga, 10 per cent owned by its customers, who were noticeably more enthusiastic than the institutions at the time of the float, has moved to the top projected band of dividend payouts, between 50 and 70 per cent of profits. On the assumptions for this year the shares therefore offer a useful forward yield of more than 5 per cent, even on a price that is well ahead of the 185p offered at the float and not far off its high of last autumn.
Yet the customer base is flat at above two million, and it is a moot point whether the proposed “affinity club” benefiting higher spenders will allow more cross-selling, as planned, or possibly upset those who do not get the best offer. The three planned emerging businesses seem to be taking a long time to get off the ground. Wealth management is a crowded market and home care brings its own dangers. The shares, off 5¾p at 204¼p and on 14 times earnings, look up with events.
My advice Avoid
Why Though the company is in a far better place in terms of share register, debt and operational efficiency, the rating does not warrant a buy
Tui Group
Tui Group was sounding if anything more bullish yesterday than its main quoted rival Thomas Cook, which also released a pre-close trading statement this week. There is not a lot that the big holiday operators can do about geopolitical events such as terrorism, which tends to depress all forms of travel. Tui is in the middle of a heavy investment programme in its hotels and cruises that will involve 40 or 45 of the former being added by 2018-19 and one new cruise ship by the summer. Two more of these are already on order, at an average cost of €500 million apiece.
This is a more asset-heavy approach than Thomas Cook and means about 5 per cent of sales is being soaked up by capital spending but this will reduce. About half of next summer’s holidays are booked, while the regional breakdown shows an encouraging rise in UK passengers and spend per head, so no obvious sterling or Brexit effect there yet.
TUI shares, off 12p at £11.23, sell on a bit more than 12 times earnings and have come on from well below £9 last summer. Thomas Cook are on less than ten times earnings, which probably gives them the edge.
My advice Avoid
Why Growth would seem to be already in the share price
Alliance Pharma
When Alliance Pharma bought the healthcare products of Sinclair IS Pharma in December 2015, it meant the achievement of about five years of M&A overnight. The company buys unconsidered or unappreciated drugs from other larger producers and had done about 26 smaller deals before Sinclair, which cost £132.2 million. This was a big jump, the £75 million raised by means of a placing being not far short of its then market capitalisation. It also meant a fair bit of debt. This should have worked out at a bit more than twice earnings; once the pound fell after the referendum, this shot up to an uncomfortable 2.8 times because much of it is in euros and dollars, although it will come back to more comfortable levels.
The deal, and others, mean the company has three main products to develop. Sinclair also brought a strong European distribution network, which meant one of them, an anti-nausea drug for pregnant women, could be acquired on a cross-Europe basis. The drug should be cleared for launch in the third quarter in the UK, with the Continent coming a year later. The second, for macular degeneration, an eye condition, is freely available as is the third, a wound treatment.
Figures for 2016 show the legacy Alliance compounds boosting revenues by an impressive 13 per cent, while the Sinclair stable almost doubles these. The shares have done little since the deal, partly because of debt worries. Up ¼p at 47¼p, they sell on 12.5 times earnings and do not look not too expensive.
My advice Buy
Why Alliance has three strong products to drive growth
And finally . . .
Telford Homes, which specialises in identifying housing prospects in less expensive parts of the capital and selling them to lessen the cost of developing them, yesterday confirmed it would be able to squeeze another in by the March financial year end. This is its fourth big build-to-rent deal to date; it has agreed to sell the first phase of open market homes at its Chobham Farm joint venture in Stratford. The buyer, for £53.7 million, is a subsidiary of its partner there, the Notting Hill Housing Group.
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