Saga Plunges as Rivals Step Up, Cost of Monarch Failure Revealed

(Bloomberg) -- Shares of Saga Plc, the U.K. provider of cruise-ship holidays and financial services for the over-50s, plunged after the company warned of an unexpected earnings drop next year and disclosed a 2 million-pound ($2.7 million) bill related to the collapse of Monarch Airlines Ltd.

Pretax profit through January 2019 is expected to decline about 5 percent from the current year, Folkestone, England-based Saga said Wednesday. Analysts had been forecasting growth of about 6 percent, according to estimates compiled by Bloomberg. The stock fell as much as 25 percent to a record low of 135.9 pence, the steepest intraday decline since a May 2014 initial public offering.

Saga said it's anticipating a slowdown in its insurance broking division. Competition in the home and motor insurance market has been heightened by increased investment from a number of large competitors, Chief Executive Officer Lance Batchelor said by phone, without naming them. Saga plans to respond by sinking 10 million pounds into customer recruitment measures, the impact of which will also weigh on earnings.

“In the last quarter, we saw a step-up in competitive pressure,” Batchelor said. “That puts the entire market under pressure, including us.”

The update raises concerns that issues in the home insurance market are more structural, while growth elsewhere is insufficient to offset that, UBS analyst Robert Rampton said in a note. Low expectations for the stock are now “not unreasonable,” he added.

Saga said it expects underlying pretax profit for the year ending January 2018 to rise just 1 percent to 2 percent, compared with the 5.5 percent first-half growth it reported in September.

The company's travel operations were disrupted when Monarch Airlines Ltd. filed for insolvency in October, leaving a number of its cruise ship passengers stranded abroad. While the U.K. government helped return customers, “eventually there's a bill for that,” Batchelor said. The total cost to Saga, also including cancellation fees and charges to replace Monarch's previously arranged flights, will be about 2 million pounds, it said.

Demand for cruises in the Mediterranean and other more distant shores such as the Caribbean and the Far East remains strong, according to Batchelor. The company's older client base is largely immune from the economic concerns surrounding Brexit, he said, reiterating comments he made in September.

Saga said a cost program will save about 10 million pounds next year, but that it expects to incur a one-off expense of about 4 million pounds relating to the changes outlined on Wednesday. The company remains fully committed to its dividend policy.

To contact the reporter on this story: Joe Easton in London at jeaston7@bloomberg.net.

To contact the editors responsible for this story: Simon Lee at slee936@bloomberg.net, Paul Jarvis, Angela Cullen

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