Here are some quick comments on the Saga IPO from skimming the prospectus before all the media do their in-depth analysis of what will no doubt be examined as a possible punt by both the millions of Saga customers and stock market speculators. Saga customers are favoured slightly in that they get one free share for every 20 purchased if they hold them for a year – hardly enough I suggest to sway my decision being one of their customers. But I thought it best to declare my interest.
One major problem is that individual investors do not know when they apply what price the shares will be. This will be determined by an opaque process involving institutional investors. The price paid by individuals could be anything between 185 and 245 pence per share, which is a pretty broad range.
Before looking at whether a price within that range might be good value, let’s just review the nature of the business. Incidentally it’s truly astonishing that the Summary Prospectus sent to Saga customers, and which will no doubt be touted by brokers, contains much puffing about the wonders of Saga’s customer engagement, but very little about where the profits come from. You have to go to the main prospectus (all 300 pages of it) to get a breakdown of where even the revenue comes from. Page 99 tells you that 43% comes from Financial Services – mainly Motor Insurance at 28%, 30% from travel, and 25% from Healthcare. The proportion of it from Motor Insurance fell substantially last year, no doubt partly because of falls in motor premiums which is a general market phenomenon in that sector. This perhaps explains why overall revenue fell last year and profits in the last three years have been effectively static – post tax profits of £108.2m, £113.3m and £109.6m in 2012, 2013 and 2014 for the years ending in January.
How does the valuation of the company look on post tax profits of £108m? On page 7 of the Prospectus (where the Key Offer Statistics are given – always a page worth reading), it states the market capitalisation will be £2.3 billion at the “mid” offer price of 215p. That implies therefore a historic p/e of 21. That’s not exactly cheap. Admiral, another big car insurance trades on a historic p/e of 13.7 for example. Brightside, another motor insurer, is just being taken out by a bid at p/e of 10. Esure was a recent IPO of a motor insurer and after a year of trading it’s at a lower price than at which it listed. Do the other parts of the business justify a higher multiple? The company has been making acquisitions in the health sector but there are few direct comparables. However care home business are usually not rated highly.
So where is the growth going to come from to justify the fancy rating? In addition the dividend yield is likely to be no great shakes and the company will still have substantial debt. The fact that the over 50s age segment may be growing might be an advantage, but can they turn this into substantial future growth in profits? They don’t appear to have done so in the last few years. Perhaps that is why the sellers wish to sell.
This is of course a common problem with IPOs where a private equity holder is exiting fully or partially – they know a lot more about the business than any buyer is likely to, i.e. this is the classic “information asymmetry” problem between buyers and sellers, whereas stock markets transactions are normally more of a level playing field.
If the placing price was as low as 185 then that would reduce the p/e to about 18 but that is still no great shakes. So in essence, this writer is sceptical that this is an IPO to jump into. However, I thought that about the Royal Mail offering where it seemed a pedestrian business with major risks attached to it – and look what happened there. It seems one reason that the Royal Mail share price took off was that index funds just had to buy it. They are actually complaining that they were frozen out of that IPO, whereas hedge funds got large allocations, forcing the index trackers to buy shares in the market later.
Saga is expected to join the FTSE-250 and might move up to the FTSE-100 so there may be some forced buying by some funds. Whether that is worth betting on is something you must judge for yourself. Of course if the media comments are favourable and it turns into a populist feeding frenzy then the market could be just as irrational as it can be.
But as a long term investment it looks more questionable unless you believe that Saga is a great brand and there are opportunities to apply it to other business segments to get some real growth back into it.