Yahoo Finance Questor: Sage investment? Not when shares trade at 18 times forecast earnings
Sage: 670p
Questor says AVOID
Last month’s Sage Summit at London’s ExCel centre had a lot to live up to. When the FTSE 100 software company put on its business conference for distribution partners, customers and fun-loving accountants in Chicago last summer, Sir Richard Branson and Gwyneth Paltrow put in an appearance.
On this side of the Atlantic, delegates gathered to hear words of wisdom from Deborah Meaden and Kelly Hoppen. Still, you get the idea. One school of thought is that to achieve technology success British firms need to act more American.
Sage has become the UK’s biggest listed technology company by a process of elimination. It speaks volumes that no one got around to snapping it up in a sector that has been pillaged by deep-pocketed Americans.
Stephen Kelly, Sage’s chief executive, wants the company to have the top spot on merit. Its software powers the accounting and payroll systems for 3m businesses. Kelly had an eye on doing more, notably in payments, where competition is hot as established players such as WorldPay do battle with newcomers including Jack Dorsey’s Square.
Sage has made good progress in migrating its existing customers on to more lucrative subscription contracts and is simplifying the business to cut cost.
However, last year a data breach may have led to some customers’ employee details being compromised. More recently, its UK managing director made a hasty exit. But self-belief is something Kelly is not short of. Working for the Cabinet Office, he pursued a reform agenda including a plan to commercialise numerous Whitehall functions. In January he bought 25,000 Sage shares.
As well as driving the business, he is styling himself as a spokesman for the little guy, speaking out on behalf of customers on issues including business rates reform.
He might have become a small business champion, but he has more to do to convince investors he is their champion too. Sage shares have risen by three-quarters since Kelly’s arrival in November 2014 but are currently trading 10pc down from last year’s peak and below the 732p point at which Questor recommended them a Buy last September.
Concerns over phase two of his transformation programme were compounded by the poor first-quarter trading performance reported in January.
Kelly has maintained full-year guidance of 6pc growth and a 27pc operating margin, but the City will hope for reassurance when interim figures are published on Wednesday. If the second half is to be better, much is riding on a new portfolio of software products to accelerate the top line and win new customers.
Even if it stagnates, Sage has a lot of appeal, including 80pc recurring revenues. Its ratio of net debt to earnings is also the lowest it has been for three years, leaving scope for £150m in share buybacks from this year on. The niggle is that its shares are trading at 18 times next year’s forecast earnings, suggesting it is being viewed as a growth stock just as there are signs of declining momentum. If only its sales figures were as impressive as some of its get-togethers. There is currently better value elsewhere. Avoid.