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

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.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Experienced Recruitment Consultant

£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

Day In a Page

Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

Cameron lowered the flag for the dead king of Saudi Arabia...

But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Humanity must be at the heart of politics, says Jeremy Corbyn
Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

Joe Biden's 'tease tour'

Could the US Vice-President be testing the water for a presidential run?
Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

Britain's 24-hour culture

With the 'leisured society' a distant dream we're working longer and less regular hours than ever
Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

The addictive nature of Diplomacy

Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

Fashion: Ooh, Lady Chatterley!

Take inspiration from DH Lawrence's racy tome with equally racy underwear
8 best children's clocks

Tick-tock: 8 best children's clocks

Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

Charlie Austin: ‘If the move is not right, I’m not going’

After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones