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SAGA operates in the insurance industry, which has characteristics that make it unique compared to other sectors. Understanding these differences is crucial when it comes to putting a value on the insurance stock. For instance, insurance firms that invest excess premiums are required to maintain a certain level of reserves to reduce the risk to shareholders. Looking at elements like book values, in addition to the return and cost of equity, can be useful for determining SAGA’s intrinsic value. Below I will take you through how to value SAGA in a relatively useful and easy approach. See our latest analysis for Saga
Why Excess Return Model?
Two main things that set financial stocks apart from the rest are regulation and asset composition. SAGA operates in United Kingdom which has stringent financial regulations. In addition, insurance companies usually do not hold significant amounts of physical assets on their books. The Excess Returns model overcomes the required capital kept on hand and lack of tangibles by focusing on forecasting stable earnings, rather than less relevant factors such as depreciation and capex, which more traditional models focus on.
Deriving SAGA’s True Value
The main belief for this model is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. The returns above the cost of equity is known as excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (11.67% – 8.30%) * £1.17 = £0.04
Excess Return Per Share is used to calculate the terminal value of SAGA, which is how much the business is expected to continue to generate over the upcoming years, in perpetuity. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= £0.04 / (8.30% – 1.49%) = £0.58
Putting this all together, we get the value of SAGA’s share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= £1.17 + £0.58 = £1.75
Compared to the current share price of £1.17, SAGA is currently priced below its intrinsic value. This means SAGA can be bought today at a discount. Valuation is only one part of your investment analysis for whether to buy or sell SAGA. Fundamental factors are key to determining if SAGA fits with the rest of your portfolio holdings.
Next Steps:
For insurance companies, there are three key aspects you should look at:
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1. Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.
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2. Future earnings: What does the market think of SAGA going forward? Our analyst growth expectation chart helps visualize SAGA’s growth potential over the upcoming years.
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3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether SAGA is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on SAGA here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.