Interactive Investor

ii view: why Sage shares just rallied to all-time high

This FTSE 100 software company continues to push its product provision towards a cloud data offering, and with AI services now in the mix. Buy, sell, or hold?

22nd November 2023 15:25

Keith Bowman from interactive investor

Full-year results to 30 September

  • Total revenue up 12% to £2.18 billion
  • Adjusted operating profit up 18% to £456 million
  • Final dividend of 12.75p per share
  • Total dividend for the year up 5% to 19.3p per share
  • Net debt down 23% to £561 million

Chief executive Steve Hare said:

"Sage performed well in FY23, delivering double-digit revenue growth, increased profitability and strong cash flows. We sustained good momentum throughout the year in all regions, driven by consistent strategic execution.”

ii round-up:

Accounting software provider Sage Group (The) (LSE:SGE) today detailed annual results broadly matching City expectations but predicted forecast-beating sales for the year ahead, with profit margins that are expected to trend upwards.

A new £350 million share buyback programme, given management’s confidence in the outlook, will help to assist earnings over the year ahead while expected organic sales growth of around 10% surpassed analyst forecasts for 9%.

Shares in the FTSE 100 company soared more than 10% in UK trading to touch a record high, having come into this latest news up around 40% year-to-date. That’s similar to rival Intuit Inc (NASDAQ:INTU) and comfortably ahead of the FTSE 100 index with a gain of less than 1%. 

Sage’s accounting and payroll solutions software is used by millions of small and medium-sized enterprises (SMEs) around the world. 

Total revenues for the year to late September rose 12% to £2.18 billion, with adjusted recurring sales climbing 12% to £2.09 billion and aided by a one quarter increase in Cloud data-based provision of its software to £1.63 billion. Cloud penetration grew to 84% from 75% in the prior year as it continued to refocus away from desktop software. 

Adjusted profit climbed 18% to £456 million, with the profit margin improving 1.4% to 20.9% and aided by continued operating efficiencies. Strong cashflows helped net debt fall 23% to £561 million, with a final dividend of 12.75p per share pushing the total dividend for the year up 5% to 19.3p per share. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results. A quarterly trading update is expected mid-January. 

ii view:

Started in 1981, Sage today has a stock market value in the region of £11.5 billion. Many of its SME customers employ less than 30 people. North America generates its biggest slug of sales at just over two-fifths, with the balance split relatively evenly between Europe and the combined UK and Rest of the World. Group strategic pushes include building its cloud-based business and expanding its diversity beyond financials. 

For investors, heightened borrowing costs for its base of SME customers may see some of them not survive over the near-to-medium term, and costs for businesses generally remain elevated. Competition from the likes of Intuit is not the be overlooked, while the forecast one-year price/earnings ratio sits above the 10-year average, suggesting the shares are not obviously cheap. 

On the upside, success in growing its cloud-connected customer base continues to be made, and diversity of both product and geographical region exists. Artificial intelligence powered services are being introduced to its customers, and while the dividend yield is a modest 1.9%, the payout has been increased every year for more than two decades. 

For now, and despite ongoing risks, this well-managed FTSE 100 company looks to remain deserving of its place in diversified investor portfolios. 

Positives: 

  • Product and geographical diversity
  • Progressive dividend policy

Negatives:

  • Uncertain economic outlook
  • Valuation not obviously cheap

The average rating of stock market analysts:

Strong hold

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