Bargain hunters pile in after Sage crash

by from interactive investor |

Sage was always one of those companies you wouldn't bet against. Yes, the rating was high, but the numbers tended to justify the market's generosity, and any wobble - there were a few - was a buying opportunity. However, a 20% plunge at the accountancy software giant following a half-year trading update, presents investors with a fresh dilemma.

The first big decision for shareholders was what to do following first quarter results in January. Shares peaked at 825p the day before, but weak organic growth triggered profit taking. They're now down as much as 35% from that high, the latest leg of the reversal today caused by "inconsistent operational execution".

Surging Sage defies doubters

That refers to Northern Europe - specifically the UK - where software subscription growth has been slow, while X3 licence sales in Africa have been below par. Group margin should remain at 27.5%, but a decline in recurring revenue growth means group organic growth of just 6.3% in the first half - Morgan Stanley wanted 7.3% - which will hit profits.

It's why Sage chiefs have cut full-year guidance for organic revenue growth from 8% to "around 7%". But this still implies growth of some 7.5% in the second half as Sage books "much" of the slippage in Enterprise licence contracts.

Source: interactive investor            Past performance is not a guide to future performance

Given there's lots still to do, and with execution of strategy a real risk, the sell-off is understandable. However, a 20% slump to 536p - a price not seen since 2015 - within half hour of the opening bell was overdone, and bargain hunters have already bid the price back above 600p.

Highly rated chief executive Stephen Kelly is backed to return Sage to winning ways, and the shares are certainly cheaper than they've been for some time. At 600p currently they trade on around 17 times earnings per share estimates for the year to September 2018, which is not far off the 10-year average.

Sage has traded between 20 and 23 times forward earnings in more recent years, but investors are unlikely to be as generous again until Kelly can demonstrate that both operations and growth are back on track.

He can do that by delivering promised organic revenue growth of 10% and a 27% margin over the medium-term. Before then, achieving 7% growth in 2018 will be a good start.

We'll get a further update on plans alongside half-year results in less than three weeks' time. Unless you got in well below 600p, or own the shares already, this may be one to watch rather than chase higher. Hold.

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