Yahoo Finance Saga plc (LON:SAGA) Is Undervalued By 25.26%
One of the most difficult industry to value is insurance, given that they adhere to different rules compared to other companies. For instance, insurance firms that invest excess premiums are required to maintain a certain level of reserves to reduce the risk to shareholders. Looking at factors like book values, in addition to the return and cost of equity, is beneficial for gauging SAGA’s valuation. Below we will look at how to value SAGA in a reasonably accurate and simple method.
See our latest analysis for Saga
What Is The Excess Return Model?
There are two facets to consider: regulation and type of assets. Financial firms operating in United Kingdom face strict financial regulation. Moreover, insurance companies usually do not hold significant amounts of physical assets on their balance sheet. This means the Excess Returns model is best suited for calculating the intrinsic value of SAGA rather than the traditional discounted cash flow model, which has more emphasis on things like capital expenditure and depreciation.
Deriving SAGA’s True Value
The key assumption for Excess Returns is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. The returns above the cost of equity is known as excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (0.12% – 9.9%) x £1.19 = £0.023
Excess Return Per Share is used to calculate the terminal value of SAGA, which is how much the business is expected to continue to generate over the upcoming years, in perpetuity. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= £0.023 / (9.9% – 1.2%) = £0.26
Combining these components gives us SAGA’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= £1.19 + £0.26 = £1.45
This results in an intrinsic value of £1.45. Relative to the present share price of UK£1.09, SAGA is currently trading below what it’s actually worth. This means there’s an upside to buying SAGA today. Pricing is one part of the analysis of your potential investment in SAGA. There are other important factors to keep in mind when assessing whether SAGA is the right investment in your portfolio.
Next Steps:
For insurance companies, there are three key aspects you should look at:
Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.
Future earnings: What does the market think of SAGA going forward? Our analyst growth expectation chart helps visualize SAGA’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether SAGA is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on SAGA here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
