Saga LSE IPO not heading for bargain price for early investors

Another big IPO is due to hit the London Stock Exchange shortly with Saga, the over 50 years of age focused financial services company.

The company is likely to have a value of around £2-2.5 billion, based on a 185p to 245p range, with the pitch to investors focused on the potential opportunities of developing the Saga brand and cross selling products through associates such as Axa PPP. The final price of the offer will be decided on May 22^nd with 1.07 billion shares being issued on the first days trading.

The new Chief Executive of Saga, Lance Batchelor, ex-Domino’s Pizza will be plenty to do to meet the high expectations of this latest retail flotation.

Existing Saga customers are being offered a sweetener to take part in the IPO with the offer one free share for every twenty they buy with over 700,000 expressing an interest to take part. It will float around half its equity compared with an initial plan of around one third. 2.1 million households currently have Saga products with each having nearly 3 products per household. Saga underwrites about 95% of its motor insurance policies itself and has plans to expand into areas such as housing and wealth management and possibly even banking. It already has a home care services business for the elderly which generates around £7 million of profits and a travel business which generates around £2 million.

The pricing of the offer led by Citigroup is lower than hoped by its owner Acromas (which in turn is controlled by Charterhouse, CVC and Permira), which also owns the AA, and the proceeds will be used to repay some of the £4 billion of Acromas debt whilst leaving £512 million for Saga itself after expenses and around £700 million of debt on its balance sheet compared with net assets of £1.1 billion or 103p per share. Saga’s net debt to earnings before interest, depreciation and amortisation ratio will be around 3.

The price range for the IPO means Saga has a forward price/earnings of between 14 and 18 times, which compares to around 10 for similar companies also listed on the LSE.  This is particularly rich given the company’s current focus on insurance products with auto and home insurance delivering 77% or £158 million of the company’s £204 million in annual operating profits in 2013. Earnings from motor and home insurance fell by £1 million last year as the number of customer it served dropped as competition for policies increased.

The company  is hoping to pay a dividend of up to half of net income with forecasts of net income of about £140 million in the coming year, equating to a dividend of 6p or so.

The float is likely to be a nice little earner for Charterhouse, CVC and Permira. Not so sure for retail investors in the short term but longer term all will depend on whether the company can successfully stretch the Saga brand far and wide without damaging its core values to the over 50’s age group in which trust is everything. Too much focus on profit rather than keeping these customers satisfied could be disastrous and with expectations so high following this IPO, Chief Executive Batchelor has a tricky balancing act with the City on one hand, customers on the other and of course the private equity owners still owning half the business.

Contrarian Investor UK

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