Sage Share Discussion Threads

[maddox] 18/5/2020 13:56

Hi martin, welcome aboard. Averaging in is the best approach I find, invariably you buy-in and the share price goes down - trying to hit the bottom is virtually impossible and in the long run won't be significant.

[martindjzz] 18/5/2020 08:34

I’ve been following SGE for a while and took the plunge today with half my normal position size. I don’t have any concerns about the company but still think we might be in for a second big market plunge.

[maddox] 14/5/2020 22:42

Hi hector, yes if you want to buy SGE you need to be opportunistic to grab the best prices. That means buying when others are selling - the contrarian mindset.

The market will always take more notice of a radical change in a recommendation, such as a buy to a hold or a sell, than a update to a target price. Canaccord had previously broke ranks with the overwhelmingly negative Broker sentiment - so this is just rejoining the pack.

I'm not perturbed by being out of line with Broker opinion - happy to back my own analysis and judgement. It's not the most comfortable stance but highly profitable when you get it right - albeit it may take far longer than anticipated for your opinion and Mr Market's to align.

Regards Maddox

[hectorscrackhouse] 14/5/2020 19:59

thanks for that. Bit of an overreaction I think, particularly as their target price is 710p.

Oh well, might have to buy a few more.

[maddox] 14/5/2020 17:33

This might have contributed:

'Analysts at Canaccord Genuity lowered software and services firm Sage from 'buy' to 'hold' on Thursday, stating the group would now have to navigate some "choppy water".

Canaccord said it made the move on valuation grounds and kept its 710p target price unchanged, even though it nudged up its 2020 earnings per share estimates by 3%.

The Canadian broker acknowledged that Sage beat first-half revenue and adjusted operating profits expectations by 2% - although the analysts pointed out that the period had not been impacted by Covid-19.

"However, and somewhat reassuringly, management provided a fairly detailed April insight as to the health of Sage's sizeable SME client base, but sensibly cautioned that this is based on only one month of empirical evidence," said Canaccord.

On that, Sage said it had only seen a "slight" churn in small business customers in April and no discernible impact on medium-size customers.

Canaccord also highlighted that Sage's margin guidance was "unsurprisingly unspecific" at this stage, other than noting that innovation had to be balanced with the current situation and advising that variable cost controls had and would continue to be implemented to reach a "financially balanced margin for FY20".'

source:

[hectorscrackhouse] 14/5/2020 14:21

Results yesterday looked pretty good to me yet down 7% today.

Anyone have a theory, apart from general market decline?

[maddox] 13/5/2020 17:20

In post 5399 above I discussed Phil Oakley's analysis of Sage in Investors Chronicle, where he was rather negative.

His latest article (IC 7 May 20) focuses on how to spot quality companies - this based on high Return on Capital Employed and Free Cash Flow margin. For SGE, based on the latest numbers today, I calculate the ROCE as 20.5% and FCF margin 23% - which are both excellent.

In his article, Phil Oakley then points to the increased uncertainty caused by Covid and then goes on to say:

'On this basis, I can see possible attractions in shares of accounting and business software provider Sage (SAGE), which looks to have a business model suited to a changing world.'

Seems like he's had a reappraisal. It's nice to be in good company.

Regards, Maddox

[maddox] 13/5/2020 11:08

Strong Sage 1H20 ending 31 March. The statutory figs of 2% revenue growth and 38% growth in profits mask the continuing transition to Saas pricing and cloud products. The interim dividend is increased by 2.5% (5.93p) and the return of surplus cash from disposals (Sagepay and Brazil) is still under consideration but postponed due to Covid-19.

The underlying metrics it's worth highlighting are:

>> Organic total revenue +5.7%

>> Organic recurring revenue +10.3%

>> Organic operating profit +3% (reflecting narrowing margin for investment in
transition)

>> Subscription revenue +26% (penetration is 62% +10%)

>> Sage business cloud revenue +42% (penetration 56% +12%)

>> Cash conversion 127%, organic operating margin 22.8%

So, the transition execution is proceeding well, with these metrics off-set by the planned decline in Software Licence and processing revenue. Some of the organic revenue growth has come from reactivation of off-licence customers but new customer acquisition to cloud-native products is accelerating.

On the horizon is improved organic sales from Intacct, only recently launched in UK and Australia, but with strong performance in N.America with +31%. The hope is that this N.American performance can be replicated elsewhere.

Covid-19 is going to affect the growth in 2H 2020 and some customers will most likely and sadly be lost to bankruptcy - but nothing much seen so far in April. Sage are not furloughing any staff, no redundancies and not using the Govt support schemes.

The B/S is incredibly strong with £912m of cash, £400m of debt facility - and net debt £213m secured till 2025. Net debt leverage 0.5x of EBITDA.

Prospects are that H2 performance will be hit by Covid, but Sage is financially strong and increasingly resilient (a Saas benefit) heading in.

[spacecake] 23/4/2020 06:44

More leadership coming onboard and into the virtual boardroom.

[maddox] 12/2/2020 10:29

Unfortunately, 'stocktraker7' hasn't bother to read my preceding post - that's because they are only interested in promoting their twitter following. Don't bother clicking the link - nothing of interest.

[maddox] 09/2/2020 13:16

Phil Oakley runs his slide rule over Sage in this weeks Investors Chronicle:



Phil Oakley's article is four pages of very solid analysis. He concludes "Sage’s shift to cloud-based subscription services has yet to pay off. It needs to raise its game. If it doesn’t it could make an attractive takeover target."

As to whether Sage becomes a takeover target (he mentions Microsoft as a potential acquirer) I won't make comment - it's not a very predictable basis for investment. However, I do agree that the key to Sage's prospects are centered on whether it can generate organic growth.

Phil Oakley is very much a numbers guy - but I'm seeing more positive trends in what is essentially the same set of data. For example, he comments that the Q1 organic growth of 6.7% is modest, but from my view point, against fy 2019 of 5.6% and fy 2018 1.7% the underlying trend is clearly in the right direction.

He also highlight's the strong growth of Sage Intacct (28% in 2019) currently only available in the US but being rolled-out this year to the UK, Australia and South Africa. It is this product, aimed at mid-tier firms, that is helping drive the US division's organic revenue growth (11.8% Q1). Might it give a similar boost to organic growth elsewhere in the coming years? Admittedly, its very early days.

The impressive revenue growth of Intuit (Quickbooks) c. 15% and Xero c.30% make Sage's growth look pedestrian. However, these two firms are fighting it out at the entry-level, start-up end of the market: Here the acquisition costs are high and prices very low. Sage is deliberately avoiding aggressively competing directly here but rather focusing its investment on its higher price-point products. And despite its competitors' obvious successful growth rates Sage have repeatedly stated that they are not losing customers.

So, a solid piece of analysis from Phil Oakley, and certainly provided food for thought, however my reading is far more positive. IMHO I think that the organic growth will come through and there is a big global market to go for.

Regards Maddox

[maddox] 28/1/2020 13:35

Following the Q1 update it appears that Canaccord Genuity have upgraded SGE to a Buy with a share price target of 820p ('Neutral' and 770p previously).

Meanwhile three others have reaffirmed their recommendations - but have all increased their share price targets:

Deutsche Bank reiterates 'Sell' with a target price of 725p (650p)
Credit Suisse reaffirms its 'underperform' share price target 640p (610p)
Barclays reiterates 'Underweight' with a target price of 620p (580p)

So Canaccord has broken ranks, it'll be interesting to see whether we get other upgrades if the positive updates continue this year.

Regards Maddox

[maddox] 27/1/2020 14:00

Hi investorschampion,

Like to pick-up on a couple of points. Sage started on their transition to subscription pricing (from licencing) over three years ago and now have 61% penetration. So well down the road now.

The impact of transition is primarily a revenue hit as 12 months of revenue paid up-front becomes one month paid on a rolling basis. Sage has some off-set benefits against this as a portion of the new-subscribers were in fact off-contract using old versions of the software. In order to get access to the HMRC mandatory online submission functionality ('Making Tax Digital') functionality these businesses have to go on-subscription. Also, as the cloud-based subscription products have enhanced functionality there is effectively a price-hike built-in to adoption of the subscription service.

On the other hand, the margin reduction (increased expense) has been use to fund product enhancements and marketing. As it costs a couple of years contribution to win a new customer but that contract tends to rolls on from year to year - its a short-term impact for longer-term value creation.

As you say, this should lead to margin improvement in the future. Intuit's Operating Margin is 27.3% versus Sage 19.7% - so a good benchmark to target. Intuit is also far more highly rated p/e 46 and yield 0.7% (Sage p/e 24 and yield 2.4%). So another couple of interesting comparators as Sage transitions (whether the UK market will ever put a similar p/e multiple on Sage I do however doubt).

So, the Sage strategy is sound, the goals are clear and the ultimate prize too. Still work-in-progress but plan execution looks to be proceeding well.

Regards, Maddox

[maddox] 22/1/2020 11:32

The Brokers Analysts are overwhelmingly negative on Sage:

Strong Buy........2...(6)
Buy...............0...(1)
Neutral...........8...(9)
Sell..............2...(0)
Strong Sell.......7...(3) Brackets are the scores of one month ago
.................19...(19)
Source: Share.com

Their share price targets are similarly pessimistic, for example, James Goodman at Barclays has recently (10 Jan) put 620p share price target and 'underweight' view. (This was an increase on his previous share price target of 580p) I've no idea what Goodman's rationale is - so difficult to contest.

Regards, Maddox

[maddox] 22/1/2020 10:26

Excellent Q1 trading update today. This provides reassurance that the transformation is being successful and the investment is paying-off. Key points:

Recurring Revenue +10.7% - indicates that the SasS transition is proceeding at pace;

Total Organic Revenue +6.7% - better indicates the underlying growth rate (ignoring the switching of existing customers to SaaS contracts);

Sage Business Cloud +12.7% - indicating the strategic shift to a Cloud-based product offering is proceeding well. This is where SGE is 'perceived' to be weak and behind their competitors Xero and Intuit. In fact Sage are fast building a powerful Cloud business with an attractive offering of products built on a common platform (an IT service fabric as they describe it).

So, whilst we're conceding a slower growth in dividend returns whilst investment in the faster pace of transformation takes place - its working well and building future value.

We also have a return of capital once the SagePay disposal completes of c. £250m to come. We don't yet know how SGE intend to make this return however, if returned all in cash would equate to, I estimate, 22p/share (current div is 16.91p).

Regards, Maddox

[mozy123] 22/1/2020 10:14

A positive update this morning - some doubts about sage a year ago but progressing the strategy well it semms.

[mozy123] 20/11/2019 11:43

Happy with the results and the investment catchup needed to become a true competitor to Intuit and other cloud offerings. Sage is one of the best performing companies ever on the ftse index, but playing catchup costs money compared to first mover advantage.

Nick Train states only 1/60 companies globally use accounting software. Happy to hold onto a long runway stock like sage.

[maddox] 20/11/2019 11:19

Hi Spacecake,

Mr Market and the majority of the brokers appear to agree with you.

However, IMHO Sage are doing exactly the right thing and also exactly what they set out to do. Which is investing in sustainable long-term (high quality,high margin) revenue growth. This hits the margin in the short term. It costs roughly twice the annual revenue to recruit a new customer but you then get 10 years plus of that revenue from that customer. So it's a highly profitable investment but you pay for it in the first year - hitting the reported margin and slowing the growth in dividends.

Mr Market and the brokers analysts are being very myopic and short term. And there-in lies the opportunity for the patient far sighted personal investor. The shares are off 33p down to 708p as I post, and with a cash return in prospect from the sale of SagePay. So I'm buying.

Regards Maddox