Interactive Investor

Saga still making money despite significant headwinds

26th January 2021 08:24

Richard Hunter from interactive investor

Insurance continues to do most of the heavy lifting and the shares are up sharply this year.

Travel stocks remain in retreat, with variants of Covid-19 unsettling investors, as the possibility of a rapid return to some kind of normality is brought into question.

For the likes of Rolls-Royce (LSE:RR.), heavily dependent on the return of air travel, the ongoing cash burn remains an issue. The company has strengthened its balance sheet and has access to ample liquidity, but the immediate strategy is nonetheless based on a relatively rapid resumption of flying hours.

Meanwhile, the UK unemployment rate has again ticked higher, although the figure of 5% is marginally ahead of expectations of an increase to 5.1%. Unsurprisingly, the hospitality sector has been hardest hit with the industry still in suspended animation.

The ultimate effects of the pandemic have far from washed through, and with the government’s furlough scheme still propping up parts of the economy, let alone the impact of companies yet to go to the wall, the true unemployment figure could well spike higher. The generally bleak economic picture has dampened investor enthusiasm of late, with the FTSE 100 still ahead by 2.8% this year, although gains are being gently eroded.

In its trading update, Saga (LSE:SAGA) confirmed that the insurance business continues to do most of the heavy lifting as travel restrictions remain. The financial position remains secure, although the monthly cash burn is a clear headwind. Even so, the company is projecting an underlying pre-tax profit for the year, despite the challenges.

Saga’s demographic lends itself to having a ready-made customer base, especially following the need for travellers to have been vaccinated, with the probable resumption of travel later in the year.

The shares have had a strong run of late, having  doubled over last the last three months, albeit from a low base. Over the last year the shares still remain down 54%, but the limited market consensus of the shares as a 'buy' reflects optimism that the company could be well placed to benefit from the escalating pent-up demand which sits alongside the pandemic.

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