Shares in Saga nosedive as collapse of Monarch airlines wounds profits

What does the latest profit warning mean for investors?

Article updated: 6 December 2017 10:00am Author: Michael Baxter

  • Saga issues profit warning citing challenges in insurance broking and collapse of Monarch Airlines as reasons why
  • Guidance for this year and next have been reduced due to anticipated lower levels of written benefits and investments into acquisitions
  • The Share Centre puts its current ‘buy’ recommendation under review

As Saga reports a surprise profit warning Helal Miah, investment research analyst at The Share Centre, explains what it means for investors:

Saga has today provided the market with an unscheduled trading update, and its news that investors wouldn’t have wanted to hear. This was effectively a profit warning for the current full year which ends in January where underlying profits before tax is expected to grow by just 1-2%, much lower than the previously anticipated rise which was closer to 6%. The cause for this seems to be the collapse of Monarch Airlines which has affected their Tour Operations significantly as well as more challenging trading conditions in insurance broking.

Meanwhile, the guidance for next year has also been reduced and the group now expect underlying operating profit to fall by 5% compared to the current financial year due to the expectation of a lower level of written benefits along with investments into customer acquisitions. Its other operations continue to perform relatively well though.

This is obviously very disappointing news for investors and the shares this morning have fallen by roughly 20%. While issues in its travel business to a certain extent are understandable as a collapse of an airline will always cause disruption, the key disappointment is in its insurance broking business. Structurally, it should be positive news since its target market of over 50’s will only keep growing. However, this group of people, are becoming more tech savvy, going online more and are taking out services with rival providers.

Our recommendation to this stock was for the attractive dividend it pays, which was near the 5% level. While no mention of the dividend was made in the statement this morning, investors will no doubt have some concern as to whether it will continue to grow or even get cut. We have now put our current ‘buy’ recommendation under review.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

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Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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