Saga – Time to Throw in the Towel

When the then CEO of this over 50’s insurance and holiday business, Lance Batchelor, effectively tore up his previous guidance a year ago, cut the dividend and announced a fundamental change of strategy, the damage to the share price was instant and severe. However, the new strategy, which included a novel three-year premium fix on motor and home insurance policies, appeared to be bearing fruit and, as capacity for the two new cruise ships, Spirit of Adventure and Spirit of Discovery, was rapidly being booked out, the shares appeared to offer good recovery potential. Indeed, the company regarded this year and next as transformational for the future trajectory of the travel business. Spirit of Adventure enjoyed its maiden voyage last summer and Spirit of Discovery’s follows this year. Each vessel was expected to deliver £40m of earnings before interest, taxes, depreciation and amortisation (EBITDA), and contribute to a healthy cash flow that would facilitate the pay down of the debt built up during their construction. The debt may have been high but repayment looked perfectly manageable. At the interim stage total net debt was £642m. In a trading statement this morning the company say they have reduced short term bank debt from £148m to £110m and underline two non-core disposals to realise £37m, so they are certainly working on it.

However, the statement also pointed to a high level of cruise cancellations in the short term and a lower level of bookings for departures further out. I can’t imagine this pattern improving any time soon and it could, conceivably, get a lot worse. Even if the cruise ships are allowed to run unfettered, and there must be a degree of doubt in the current environment, those that do not wish to risk being quarantined in port for weeks on end must be numerous and growing. Quite where this leaves the debt repayment schedule is anyone’s guess. Management had planned to sell its Titan Travel and Destinology holiday businesses, which may have raised £100m or thereabouts, but they have been forced to shelve any such idea. For how long? Who knows? The tour operation business bookings for 2020/21 were down 20% on the previous year and the impact in recent weeks is more significant.

The results for the year to 31st January are due to be announced on 2nd April. The numbers themselves should not hold any shocks, covering, as they do, a pre-coronavirus period. However, it is hard to see how the company can put a positive slant on anything for the current trading period and cancellation of even the reduced dividend seems inevitable. The virus could not have come at a worse time for them with debt still close to its peak and the wherewithal to repay it coming under severe pressure for an, as yet, indeterminable period of time.

It might be a bitter pill to swallow but I think it is time to call it a day with this share whilst there is still some value left. Current price 25p.

 

Russell Dobbs FCSI

 Chartered Wealth Manager