Sage shares surge under new boss

An appalling 2018 ended on a stronger note, and Sage shares have been chased to a five-month high. Graeme Evans explains why.

After an uncharacteristic period of turbulence in 2018, FTSE 100-listed accounting software business Sage Group (LSE:SGE) has started 2019 on the front foot.

Under new chief executive Steve Hare, appointed last November, the company impressed analysts today as it reported a better-than-expected 7.6% increase in organic revenues to £465 million for the first three months of the financial year.

Shares jumped 8.7% to 644.6p - their highest level since August - amid more progress in the transition towards cloud-based subscription services. Software subscription growth jumped by 27.7% to £237 million in the quarter.

The improvement reverses some of the heavy share price losses seen in 2018, when the blue-chip stock tumbled by a third at one point and the company announced the surprise departure of boss Stephen Kelly.

At the helm since November 2014, Kelly took Sage from having no cloud presence to recording £300 million of annualised recurring revenues, growing at a rate of over 80% in his last year. Shares climbed steadily over a sustained period until they peaked at over 800p in early 2018.

Two cuts to profits guidance in 2018, partly blamed on "inconsistent operational execution" undid much of that progress, leaving shares as low as 523p.

Source: TradingView (*)  Past performance is not a guide to future performance

Kelly's replacement has committed to building a much "higher quality business", based on the faster transition to cloud-based Software as a Service.

To get there, however, Hare has already said there will be some short-term pain, with flat top line revenues as the company transitions away from the old licence-based model. There will also be £60 million of investment needed to support innovation and customer relationships in 2019.

But Hare said today:

"We have been encouraged by the strong start to FY19."

Even though a return to the days of 800p - when Sage traded at up to 23 times forward earnings - is still a long way off, many analysts are supportive of the plans. Stifel has a price target of 679p, while Goldman Sachs is at 670p.

The stock trades on a price/earnings (PE) multiple of 19.4x, falling to 18.4x in 2020. It is supported by a dividend yield of around 3%, having increased the pay-out every year since 1999.

Analysts at Stifel said:

"Shares have rebounded from an over-sold position, but they still enjoy valuation support and so we are relaxed with our ongoing 'buy' recommendation".

However, they warned that many challenges lie ahead for the new regime:

"As a caution we highlight that as a new CEO, Steve Hare has to navigate through disruption caused by cloud competitors, customer defections as well as try to grow and evolve Sage. Asking Mr Hare to play offense and defense is the proverbial big ask."

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.