Saga - still plenty to go for

Saga (SAGA.L): After a rocky start, Saga seems to be settling into stock market life. Today’s interims, to 31^st July, show EBITDA up 0.8% at £130.6m, with Financial Services and Travel contributing £136.5m (+5.2%). Reflecting life in the public arena, media and central costs jumped from £1.2m to £6.5m, after which they should level off. Further down the P&L the comparatives get a bit distorted by the flotation process last year, hence pre-tax profit up 140% at £101.3m and eps up 121% at 7.3p. Cash generation is good with ‘available operating cash flow’ of £139.1m (+0.9%), whilst net debt to EBITDA has come down to 2.35x from 2.56x. A maiden dividend payout of 2.2p has been declared, with the group re-iterating its policy to pay out 40%-60% of earnings, on a one third/two thirds split. The Financial services division continues to be helped by a very low Combined Operating Ratio of 68.0%, which looks unsustainable to me (or is it just that the over 50’s really drive that well?). The new motor panel is in place to further grow the business and the Bennetts motorbike insurer is now on board. In the travel division, a new cruise ship has been ordered, with an option on a second. They have 11m (July 2014: 10.6m) names on their database, of which 2.6m (July 2014: 2.7m) are active, holding 2.6 (July 2014: 2.7) products each. Clearly these numbers are drifting backwards and whilst being a weakness, also offer an opportunity. There are around 22m people over 50 in the UK (c35% of the population) and that number is growing, so the target market is huge. In the outlook the Board confirm that they are on track to meet expectations for the year.

Consensus eps for the year to 31^st January 2016 are 13.1p, giving a PE of 15.7x at 206p. If 2.2p is a third of the final, which points to a 6.6p total, being a yield of 3.2%. That would be a payout ratio of a smidge over 50%, at the mid-point of their stated range. Strong cash generation should enable net debt to come down further, meaning that the board could then start to edge up towards the 60% payout level in future years. Given the growth opportunity, long term high single digit eps growth and dividend growth potential, I think that this is still a stock to tuck away, even after the move up from the 163p level, when I first wrote favourably on the stock in January. (Neil Cumming^, 30^th September 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower