It won’t be another giveaway float but Saga can’t afford to let down investors


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The Independent Online

Investment view: Saga’s forthcoming flotation has prompted a grey gold rush, with 700,000 of the company’s customers registering an interest in taking part in the listings.

Web-savvy over 50s, who use the company for everything from motor insurance to cruises to carers, still have until lunchtime today to sign up for the shares. But should they?

The increasingly controversial privatisation of Royal Mail has no doubt played a role in encouraging people to join the stampede. Having been floated at 330p, its shares hit a high of 615p within a matter of weeks and are still trading above 550p – leading to a political storm. From the investor’s point of view, however, and even with applicants getting only minimum allocations of shares, that’s free money and what’s not to like about that?

Unfortunately, the private equity firms that own Saga aren’t likely to repeat the sort of mistake made by the Government. This sell-off will not be Royal Mail redux, nor anything like it.

Despite high investor demand, the bears have been savaging the float all week. The Daily Telegraph, whose readers have a similar demographic to Saga’s customers, has been a notable sceptic. But it’s hardly alone. And spread better IG’s grey market (highly appropriate, this moniker) indicates that if the shares are priced near the top of the range at 245p, there won’t be much in the way of early profits for investors who buy in. 

However, there is a counter to all this negativity. Investors might not make the hundreds of millions they collectively pocketed in the cheap-as-chips Royal Mail sell-off, but there are still profits to be had through buying into the Saga story – not least because it cannot afford to depart from that narrative.

One of Saga’s strongest selling points is its brand. With so many firms treating elderly consumers with benign neglect at best, Saga stands out – and its customers respect, even love it for that reason.

That brand would be badly damaged were the company and its owners be seen to have sold  customers an investment pup with Saga shares. It could also make future share sales difficult as  the current owners will still own a majority of the share after the float. So Saga needs to price this float to go. And it would be to the private equity firms’ benefit to leave something in the tank for the new owners. 

Assuming the shares are priced at the top of the range, the company’s multiple based on next year’s forecast earnings won’t be much above 18 times (with a yield approaching 3 per cent). Does that represent value? It isn’t easy to say with any certainty.

Saga is a complicated business. It currently makes most of its money from insurance and insurance broking (close to four-fifths of its earnings), but that’s due to fall to around  50 per cent over the next few years as other financial services and new businesses take up the slack.

There is also a travel business, including a couple of cruise ships, various other financial services, and even care provision.

This, then, is in effect a mini conglomerate, and the stock market usually values conglomerates at less than the sum of their parts. Saga is hoping that it will prove the exception, adding value to businesses through attaching its brand to them.

The company’s debt burden will be around £700m post flotation, a relatively heavy  weight to carry but manageable.

As for the future, the group is also seeking to expand into new markets and grow existing ones, and the elevator sales pitch for Saga is pretty clear. The number in the over-50s age group that it targets is set to grow by 10 million over the next 10 years. Britain’s demographic is an ageing one. Health and care provision has potential – at least for the company that can get it right – while the Government’s decision to junk the requirement mandating that people who retire buy an annuity means that advice will be in high demand.

Some of the new business areas that Saga is targeting are already fairly crowded fields. And some are risky – just imagine the future for Saga if it managed to hire bad apples for its care business. Still, with the clout of its brand  and its database of customers, the company could still succeed, especially if it were to operate in a professional manner and avoid the obvious pitfalls that rivals in those fields seem to have a habit of falling into.

Really, the fears may be over stated and earnings could easily start to take off after relatively sluggish recent growth.

Those who apply for shares have to put up their money – at least £1,000 – and will only know how many they are going to get after the pricing is complete.

Customers will, however, qualify for a bonus of one share for every 20 they hold for more than a year.

Saga is by no means risk free. But the need to keep its demanding customers happy means the company should be sensible when it comes to making a pricing decision. That, for me, swings the balance in favour of buying. Albeit with a degree of caution.