Interactive Investor

ii view: Sage shares rally after first-half results

14th May 2021 15:51

Keith Bowman from interactive investor

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This accounting software giant is upgrading full-year guidance and the dividend. We assess prospects. 

First-half results to 31 March

  • Revenue down 4% to £937 million
  • Adjusted operating profit down 11% to £191 million
  • Interim dividend of 6.05p per share, up 2%
  • £1.4 billion of cash and available liquidity

Guidance:

  • Expects organic recurring revenue growth for FY21 to be towards the top end of its previous 3% to 5% range
  • Looking beyond FY21, expects margins to trend upwards over time

Chief executive Steve Hare said:

"Sage performed strongly in the first half against tough comparators, with continued recurring revenue growth and increasing levels of new customer acquisition, principally in cloud native solutions. 

“We believe that small and medium-sized businesses will lead the recovery, and I am confident that our strategic investment in Sage Business Cloud will continue to accelerate growth, as customers become stronger and more digitally-enabled."

ii round-up:

Accounting and business software provider Sage Group (LSE:SGE) today reported above-forecast growth and raised its full-year expectation towards the top end of its previous estimate range. 

Organic recurring revenue growth of 4.4% beat analyst estimates nearer to 3.6%, with growth for the full year now expected to come in towards the top end of management’s prior 3% to 5% guidance range. 

Sage Group shares rose by more than 3% in UK trading, leaving them up by more than a fifth since pandemic induced market lows back in March 2020. Shares for industrial software provider AVEVA Group (LSE:AVV) Group are up by a similar amount over the same time.

Over recent years Sage has focused on growing recurring revenue through the transition of customers from desktop software packages to cloud-based subscription services. In 2020, it upped its investment in both product and marketing at the expense of the near-term profit margin to try and reaccelerate slowing growth.  

Organic growth of 8.2% for 2020 was down on the 10.8% achieved in 2019, although is now expected to hit around 5% from a previously estimated bottom of the range 3%. 

Growth in recurring revenue reflected management's focus on acquiring new customers and migrating existing customers to Sage Business Cloud. A 21% fall in other revenue was in line with its strategy to move away from lower margin desktop licence sales. 

Adjusted operating profit over the half year to the end of March fell by 11% to £191 million, with adjusted profit margin down to 20.4% from the 22.5% reported during the first half of 2020, blamed on increased investment spend.  

The interim dividend was raised by 2% year-over-year to 6.05p per share. 

ii view:

Sage employs around 13,000 people and serves customers in over 20 countries. It generates strong cash flows and benefits from sizeable and dependable recurring revenues. Its software products are used daily by businesses of all sizes on an international basis. It has been busy investing in cloud computer connected solutions, launching its Sage Business Cloud back in 2018. Its focus on driving revenue to cloud solutions has resulted in its business cloud penetration increasing to 65%, up 6% year-over-year.

For investors, uncertainty created by the pandemic and its impact on Sage’s SME customer confidence to spend should not be forgotten. An estimated forward price/earnings (PE) ratio above both the three and 10-year averages continues to suggest that the shares are not obviously cheap. But signs that management action is beginning to work are emerging. A progressive dividend policy which has seen consecutive increases made over more than 15 years also offer a key attraction, and a forecast and historic dividend yield of over 2.5% is not to be overlooked in an era of ultra-low interest rates. In all, the balance of risk and reward may now be in favour of the bulls. 

Positives: 

  • Strong balance sheet
  • Progressive dividend policy

Negatives:

  • Organic operating profit margin of 20.4% from 22.5%
  • Persisting Covid-19 uncertainty

The average rating of stock market analysts:

Strong hold

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. 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.

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