Why Sage continues to impress

by Graeme Evans from interactive investor |

With the software firm's turnaround on track, is there more to come from the Sage share price revival?

The turnaround of accountancy software group Sage (LSE:SGE) passed another test today, despite an initial shares wobble by the FTSE 100 Index stalwart in the wake of half-year results.

The stock opened 4% lower after chief executive Steve Hare reported sales growth of 6.2% to £941 million for the six months to March 31, below the City's consensus of 6.7%.

Shares later recovered, however, as it became clear that the company's transition towards cloud-based subscription services was continuing to make progress. It reported strong growth in recurring revenues of 10.2%, underpinned by software subscription growth of 27.7%.

And in guidance for the financial year, Sage expects to be at the top end or exceed its forecast range on recurring sales growth of between 8% and 9%. In contrast, software product sales will be at the low end of expectations following an 11.8% first-half decline.

With Sage maintaining its profit margin guidance of between 23% and 25%, Hare said overall expectations for 2019 were unchanged.

Analysts said the update offered reassurance after a turbulent 2018 saw two profit warnings as the company struggled with the transition from its old licence-based model. This led to the departure of CEO Stephen Kelly as the shares fell from more than 800p in early 2018 to 526p later in the year. Shares have since rebounded 21% to 732p this year.

Broker Jefferies said the results had gone a "long way to re-instilling confidence in the company and management's ability to execute on its migration strategy".

They have a price target of 825p, adding that the unchanged margin guidance showed the company was striking a balance between investing for growth and maintaining profitability at an appropriate level.

Stifel added:

"Company transformations hold out the promise of better earnings and a re-rating, but they do drag on. In our view, there are signs that Sage is finally starting to turn the corner."

The optimism going into today's has lifted the company's forecast price/earnings multiple to 22x, which is too expensive in the eyes of some analysts. Morgan Stanley has a price target of 575p, while UBS has a sell recommendation at 520p.

Sage, which trades with a 2.3% yield, increased its half-year dividend by 2.5% to 5.79p a share today. It has lifted the pay-out every year since it entered the FTSE 100 Index in 1999. 

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