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Why I’m planning to buy Saga shares

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·3-min read
Young lady working from home office during coronavirus pandemic.
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Regular readers of my articles will know I’ve been following Saga (LSE: SAGA) shares closely over the past 14 months.

In the second half of last year, I became cautiously optimistic about the outlook for the company. The pandemic decimated its cruise ship business, but the over-50s travel and finance specialist still had a high customer support and brand recognition level.

I thought this support and brand recognition would help the business recover as the economy started to reopen.

Initial indications seemed to suggest that’s what’s happened. After coming close to collapse last year, the company is reporting increasing demand for its cruises. Moreover, after several years of restructuring, its financial division is also returning to growth.

And after watching the company restructure and rebuild, I plan to buy Saga shares for my portfolio.

Restarting

One of the reasons I haven’t rushed to buy Saga shares despite the company’s improving outlook has been the uncertain environment that’s prevailed throughout the coronavirus crisis. But according to its latest figures, it seems as if the business is starting to move on.

According to a trading update published ahead of the group’s annual general meeting, load factors for the company’s cruises are 77% for 2021/22 and 48% for 2022/23. This is above expectations. At the same time, the firm’s cash burn rate has fallen dramatically. As this has slowed, the outlook for Saga shares has improved.

Meanwhile, its insurance business’s retention rates and profit margins are also proving to be better than expected.

Of course, there’s still a great deal of uncertainty surrounding the cruise business, as the restart is dependent on government restrictions. However, it looks as if policymakers are set on reopening the economy in the next few weeks.

As well as planning for the re-opening, management has also been shoring up the group’s balance sheet. Last week, the company put forward plans to raise £250m via a fixed-rate guaranteed unsecured bond. It’ll use some of the funds to repay existing borrowings and strengthen its overall balance sheet.

Saga shares on offer

Considering all of the above, I think the over-50s travel and finance specialist could be primed for takeoff over the next few months. And if the business performs as expected, or even outperforms expectations, I think the group may see rising sales and profits over the next few years as it builds on the recovery.

Still, Saga’s success isn’t guaranteed. As noted above, the cruise business is still subject to government restrictions. Further, insurance is a highly competitive business, and the group will need to work hard to retain its customers. In the past, it failed to do that, and the division ran into problems as a result.

Even after taking these risks and challenges into account, I still think Saga shares have tremendous potential. That’s why I plan to buy the stock for my portfolio as a long-term growth play.

The post Why I’m planning to buy Saga shares appeared first on The Motley Fool UK.

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021

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