Should you buy shares in Saga?

Insurance and holidays group Saga is set to float in the largest public share offering since Royal Mail. But are its shares a similar steal?

In the biggest public share offering since the Royal Mail flotation, Saga is to become a public listed company. Saga intends to sell a quarter (25%) of its shares, raising £550 million and valuing the group at £2.2 billion. After a successful float, the group will have around £700 million of net debt.

In order to encourage wider ownership of its business, Saga is to offer shares directly to private investors via a public offering. For members of the public, the minimum purchase will be £1,000 of shares. However, Saga customers and staff will be given priority share allocation, plus they will get one free share for every 20 they buy. In effect, this freebie gives these priority applicants a 5% discount off the headline share price.

And the deadline to apply to invest is the 20th May, so you need to get your skates on.

The float is expected to place a £2.2 billion value on the insurance-to-holidays group, allowing it to enter the mid-cap FTSE 250 index. Should its market value rise after the public issue, Saga could possibly even enter the blue-chip FTSE 100 index of elite British companies at the next quarterly reshuffle.

According to Saga, the early indications are that around 700,000 of its 2.1 million customers have expressed an interest in buying shares in its public offering, making it the most popular share sale since Royal Mail came to market six months ago.

To apply for Saga shares, you will need to register at the firm's website without delay, or you may lose out.

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Who is Saga?

Before you buy shares in any business - public or private - you should first learn as much as you can about that company.

Saga is a retirement specialist, focusing exclusively on the UK's over-50s offering everything from financial services to leisure and entertainment. The majority of its profits come from financial services, such as motor and home insurance, savings products, travel money, and so on.

In addition, Saga Holidays makes sizeable sales from package holidays and tours - it owns and operates two cruise ships, plus a hotel in St Lucia in the Caribbean. Saga also provides home-based care nationwide through two healthcare businesses it owns.

In other words, Saga Group is something of a mixed bag of businesses. On one hand, it is a leading British player in financial services, but on the other, it is a travel and leisure firm. So when Saga does come to the London stock market, it may be difficult to put the group into a particular stock-market sector.

Following the float, the net proceeds of £550 million will be used to pay down Saga's debt from £1.25 billion to £700 million. This float will deliver bumper profits to Charterhouse (Saga's majority shareholder for the past decade) and other owners.

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Saga shares are not a snip

In its latest financial year to end-January 2014, Saga brought in record revenues exceeding £1.2 billion and generated EBITDA (earnings before tax, interest, depreciation and amortisation) of over £222 million. Over the past three years, these figures have grown by 4.7% and 7.4% respectively, so Saga has ridden out our post-crash economy rather solidly.

One problem for potential buyers is that unlike the Royal Mail, whose shares were sold for a song at 330p, Saga shares are not a snip. Equity analysts estimate that, after flotation, Saga shares will trade at a ratio of between 18 and 20 times its yearly earnings per share. With the FTSE 100 index on a forward price-earnings ratio of around 16, this suggests that Saga shares may be on the pricey side.

What's more, when the Royal Mail floated, its shares offered a 6% dividend yield - one of the juiciest in the FTSE 350 index. From its prospectus, it's clear that Saga shares won't pay out such a bumper dividend. Indeed, with the firm intending to distribute only 40% to 50% of its net income in dividends, Saga's dividend yield is unlikely to be above 2.5% a year. What's more, Saga's maiden dividend won't be paid until June 2015, so investors will have to wait 12 months to see a cash return from their shares.

What do you think? Will you be buying shares in Saga? Let us know your thoughts in the comments box below.

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