'We are no longer an insurance company with a small travel business on the edge,’ proclaims Saga’s (SAGA) chief executive Lance Batchelor. The FTSE 250 stock has been trying to get this message across ever since floating on the stock market in 2014; and now it has clear evidence to back up this claim.

Full year results published on 29 March revealed a 10.4% rise in pre-tax profit from its travel division to £14.9m. While only a small fraction of the £215.1m profit it made from insurance, Saga says it has reached a turning point in terms of how travel contributes to the group.

‘Three years ago when we floated, we set ourselves a five year ambition to double the travel arm’s profitability,’ Batchelor tells Shares. ‘That will now be delivered a year early.

‘We are also setting ourselves a new target. We will increase travel profit by four to five times this year’s level over the next five years, helped by having two new cruise ships.’

The company is very excited about its future prospects; you should be too.

What does it do?

Saga is known as a specialist in the provision of holidays and insurance for the over-50s market. It has a very well-known brand; it is highly profitable; and it pays decent dividends. It should also benefit from favourable demographics, such as people living for longer and many retirees being financially comfortable.

We believe it has right ingredients to reward investors handsomely over the long-term. So why hasn’t the share price gone anywhere over the past few years?

At the moment few analysts seem to be truly excited about the business (that’s a good sign, in our view). We’ve also heard comments from retail investors that they view growth as being too pedestrian. That might explain why the share price seems to be stuck in an 180p to 220p trading range.

Fundamentally we think Saga could be one of those stocks where people in 10 years’ time look back and kick themselves for not buying when no-one was really interested in it (i.e. now).

Enviable position

Saga is a rare beast on the stock market in that many of its customers are extremely loyal to the brand. They have multiple products from the company and some even consider themselves as being part of a community. How many other retailers or insurers can say the same?

Batchelor says 20% of Saga’s customers account for 80% of the group’s profit. The company has spent a long time understanding how this segment came to become so loyal, so that it can a) try and sell more relevant products to them (483,000 individuals) and b) see which other customers have similar characteristics.

‘We’ve looked at where they live, what they’ve done, where they go on holiday, among many other attributes,’ says the CEO. ‘We’ve then analysed our database to see who else is a similar match.’ The company says it has found 511,000 relevant customers.

A clearer focus

This isn’t the first time the company has explored ways in which to have a deeper relationship with customers. It already has three operational pilots to see if there is merit in developing new strands to its business.

The first is financial services, namely Saga-branded credit cards, savings, loans, wealth management, share trading and equity release.

A home care pilot is going so well that Saga has now announced plans to expand the service. ‘We are sending carers to look after Saga members in their own home as they get older,’ says Batchelor. That certainly plays to the Government’s desire to reduce pressure on hospitals and increase the amount of care given in the home.

The third pilot is retirement villages. It is identifying suitable residents from its database and introducing them to a retirement village operator. The CEO says he wants to expand this pilot in the next year or two.

A membership scheme will be launched later this year under the banner of ‘Saga Possibilities’. It is billed as a loyalty initiative and every customer will be enrolled in the scheme. ‘We will provide access to events, opportunities for people to learn new skills, help build communities, have discounts; all as a way of saying thank you for customers’ loyalty.’

Powerful plans

The combination of all these initiatives to interact with customers and try and get them to do more with Saga could have very powerful results, in our opinion.

Earlier initiatives are already proving successful. In 2015 it added a panel of independent underwriters alongside its own underwriter to provide a broader range of motor insurance policies. That is now having a positive impact on profit.

It has also ordered a new cruise ship that will offer modern facilities and use less fuel, so more profitable for the group. Initial customer interest for the ship has been very positive.

Saga’s new growth target for the travel division assumes another new ship is ordered, most likely costing £300m.

You certainly cannot accuse the business of being pedestrian. This is an essential stock to own, so buy at 201.7p.

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