How Sage surge can continue

by from interactive investor |

In keeping with the accounting profession it serves, the rise in shares at software company Sage has been steady and unassuming. But when you consider we're talking about a journey that began in 2012, when the shares stood at a mere 254p, this is a performance that really is worth shouting about.

The stock continued its momentum today, having briefly broken through the 800p barrier following the release of better-than-expected full-year results, showing organic revenues growth of 6.6% and a 10% surge in profits to £475 million.

The results marked the conclusion of a three-year transformation programme outlined in June 2015 and for which Sage has met targets of 6% organic revenue growth, and 27% underlying operating margins, in each of the three years.

The turnaround at the payroll and accounting software giant has been overseen by chief executive Stephen Kelly, who took charge in November 2014. Since his arrival, Sage has gone from having no cloud presence to £300 million of annualised recurring revenue, growing at a rate over 80% in the last year.

Sage will now update the market on its future growth plans at a Capital Markets Day on 25 January. But until then, there's a sense among investors that the company is at a crossroads.

That's demonstrated by the mixture of analyst comment today, with Stifel among the most upbeat with a 'buy' recommendation and new price target of 863p, implying 10% potential upside.

Analyst George O'Connor said Sage's continued transition to the cloud was significant, but that the main attraction remained the company's strong cash generation.

He has raised his 2018 forecasts to show revenues of £1.9 billion, pre-tax profits of £519 million and an EPS of 34.8p, up from 32.9p previously predicted. That puts the shares on a forward price/earnings (PE) ratio of 22.6, it's reward for forecast annual EPS growth in the high single-digits for at least the next couple of years.

O'Connor added: "Tech recoveries are about the three 'Ps' - product, people and process - and while we should get more on these at the Capital Markets Day, these final results are far more than a curtain raiser."

UBS is more cautious, with a price target of 680p, while analysts at Barclays think there's a potential downside to around 685p.

Barclays questioned whether Sage managed to deliver any meaningful growth on an underlying basis.

It added that the sale of Sage's US payment business and the acquisitions of cloud-based businesses Intacct and Fairsail, meant that Sage did not require any underlying improvement to meet its 2018 target for 8% organic revenue growth and margin of around 27.5%.

Barclays said: "Underlying there is little improvement noticeable, but optically the growth is starting to look attractive.

"The stock reaction today will be largely driven by CEO Kelly's ability to convince investors that the next stage of the transition will deliver the promised underlying improvement in KPIs."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.