LON:SGE a wise investment?

21st Jan '21 by Berksbee

20 comments 1374 reads

LON:SGE. I already hold Sage and I am sitting on a very small loss – however it has piqued my interest and I have recently topped up. I am wondering whether I should add more. Reasoning:

it’s a big favourite with Terry Smith and Nick Train - TMF. This was the catalyst for my recent interest – and there are worst things to do than buy their conviction shares on a low
Looking at the Stocko score it has a stunning quality score but is on a punchy 27 P/E. But the P/E needs to be put in context – it has been on the path to migrating to SAS – (software as a service) – essentially foregoing up-front licenses for a more secure revenue stream. So, in this light the P/E is not that punchy. Especially when many tech shares are in Bonkers Land.
It has an extensive Customer base and global reach. My experience says (and I spent my career in software) these sorts of companies either rerate or get bought.
It fell off a cliff in March, had a small rally and then dropped again. This is the profile of a Covid victim, which it most likely not.
Todays trading update was decent IMO, growth of 1.4%, and the slight jump in share price says the market agrees with me.
Good dividend record

Would be interested in the views of others. I know it’s not a 10 bagger but I can think of worse places to put my money right now.

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Berksbee

21st Jan '21

Apologies for the typo in the title - but hopefully doesn't affect the link

Mark Tughan

22nd Jan '21

I bought on the recent cliff fall you mention. It was on a watchlist of stocks I have wanted to own but only at the right (i.e.a better) price, and this wobble provided it.

It did seem to suffer from weakness as it was potentially lacking progress on the transition so sass, but this latest update seems to have reassured the market. We'll see!

I think around 600p is an attractive entry price and from my limited knowledge of charts - moving averages and things like RSI (oversild/overbought) - there seems to be a nice set up today for the coming months (although this for me is a potential long term, dividend paying compounder).

You're right it's not a ten-bagger but I think there's potential for 30% + dividends over a reasonable timeframe. The risk/reward seems good at around 600p.

Armorduck

I've held for a number of years. I also hold Fundsmith and sense Mr Smith might be losing patience. The following is from his latest letter.

"Sage’s share price remains in the doldrums as we wait to see whether the new management team can make the product fit for purpose in the age of the cloud and subscription software and compete effectively with those who can."

Mike888

23rd Jan '21

I fear the company is stuck in neutral, no top line growth, reducing forecasts.

For me I think the price is up with events, and probably still a little rich even after this tumble. The promise of a SAAS revolution may be keeping it at these multiples and I guess it's pretty obvious that it'll get there. It's on my watch list and I may be tempted on further weakness, but until either that, or some proper SAAS traction I'm on the side lines watching.

Maddox

Hi Berksbee,

I'm a long-term holder and have been scaling-up.

If you look closely at the recent results you'll see a cloud-based SaaS business being masked by the heritage business that is being wound-down or exited. Overall, it looks rather pedestrian but at some point soon this drag-factor will diminish and a well-positioned, cloud-based SaaS high-growth business will emerge.

Just MHO of course,

Regards Maddox

24th Jan '21

https://www.linkedin.com/posts...

Paul Hill gives a short right-up of his recent investment in Sage (LON:SGE)

25th Jan '21

I cant tell you how useful this link will be to me if it's the same Paul Hill who used to work for Money Week. Sounds from the way he writes it is. I subscribed to his Precision Guided Investment service through MW and then it was suddenly stopped and Paul disappeared. Cut a long story short, his recommendations were brilliant ( 2 ten baggers in a list of 10 shares for starters) and I've been trying to find out where he went ever since.

Javahart

I used to hold. My personal view is that trading will be tough, a large number of small businesses have gone or will go (sage users) due to CoVID. The market is also more congested with offerings from xero etc. One to watch as they always stuck me a well run business.

Yep it's the same Paul Hill.

Hi Javahart,

Yep I take your point, Covid-19 and Brexit will generate increased 'churn' as it euphemistically termed.

As to your other point regarding competition; basically it's Xero and Intuit at the entry level and a host of ERP providers at the top-end. I always look for signs of competitive pressure but never find it. When asked, Sage always deny that they are losing customers to the competition. I think that the reality is that Sage isn't actually competing very aggressively at the low entry-level but that customers, once they've chosen a solution, don't tend to switch. So they may not be winning them but their not losing those that they do win. Also, it's the SME segment where Sage (LON:SGE) better positioned.

One star in Sage's constellation is Sage Intacct - which they acquired in July 2017. It is an SME to Enterprise scale cloud-native financial management solution. It has been an important contributor to Sage's growth in North America and is now being rolled out in the UK and Australia.

Gartner have rated Intacct with the the highest product score for the Lower Midsize Enterprises use case with a 4.61 out of 5 in their “Critical Capabilities for Cloud Core Financial Management Suites for Midsize, Large and Global Enterprises” Report.

The Lower Midsize Enterprises are firms with revenue between $50m and $500m - which is Sage's sweetspot. Sage's competitors in this market segment are big ticket solutions from the likes of Oracle, SAP, Microsoft (Dynamics) [please note the absence of Xero and Intuit in this list ].

Investors appear somewhat mesmerized by Xero and all, and are thus perhaps not seeing the full picture.

n-star

What puts me off regarding Sage, is that I feel accountants are using the software, but companies and sole traders will likely move to Quickbooks or Xero.

26th Jan '21

Very useful Maddox - I have a background in the Industry and concur.

18th Nov '21

Mr Market seems to have liked the results, with the shares up to 790p as I post.

The top-line figs always look a bit mixed on a first look - as the business transitions into a cloud-based SaaS business. The decline in old-style licencing revenue and activities masks some highly positive growth particularly in H2. This momentum is anticipated to continue into the current year, so the outlook is positive.

A few highlights:
Annual Recurring Revenue +8%
Cloud Native Products +44%
Renewals by Value 99% (H2 c.101%) this is without any price increases.
Cash conversion 126% - driven by the move to subscriptions.

The star in Sage's product portfolio is Intacct aimed at medium-sided firms. In North America (USA and Canada) it's driving recurring revenue growth of 22% primarily through new customer acquisition. This is excellent performance in what is seen as Sage's competitively toughest market. Intacct is only just being rolled-out into other markets - if it can replicate the NA performance geographically it should have a big impact. Currently, 50% of Sage's revenue comes from the medium-sized business sector. So, something to keep an eye on.

With Sage Business Cloud penetration up to 67% from 60% last fin year the transition still has some way to go. However, the bright and shinny Cloud-based SaaS business is becoming more apparent and a very attractive business it's shaping up to be.

Regards Maddox

BnB

History shows that the transition from licence revenue to a SaaS model pays off in the end so you might do alright with your investment. However there are better prospects going through a similar transition. If you are able to invest in US stocks then the key example is Splunk which is close to realising the transition and whose shares have hit the bargain basement on a change of CEO in the last week. I’d sell Sage for Splunk in a heartbeat.

Furthermore I’m a huge admirer of Terry Smith’s approach and of a large number of his holdings, many of which I have in common, from Nike to Microsoft. However his track record in choosing software companies is notably poor relative to other sectors. Look at the Smithson holding in Checkpoint software. In a two year period when 100% gains have been humdrum for most cyber security stocks and multibagging had been widespread, Checkpoint has stayed flat on negligible growth. In short, I think Smith is seduced by the excellent operating numbers that mature software companies produce instead of going further to understand the technology and the trajectory of its demand. He should have dumped Sage many years ago and bought Adobe and ServiceNow (which he did buy more recently for his private wealth portfolio).

19th Nov '21

Hi BnB,

Thanks for tipping Splunk. I see it's 18.9% down this week - hugely unprofitable has a -40% operating margin and -50% profit margin and trading on a valuation of $22bn = c. 10x revenue. It also has $3.27bn of debt so compounding business and financial risk.

I think I'll stick with Sage - much prefer the balance of risk/reward.

Regards, Maddox

And therein lies the problem deciphering the accounts of a business transitioning to SaaS. Splunk. leading its niche (unlike Sage) is expected to go cash flow positive this quarter, EBIT positive in 2023 and to triple revenues in the next few years. This week's sell-off (on removal of the CEO in favour of more heavyweight candidates) looks like a gift to many analysts.

Compare Sage's anaemic growth rate, flat for a decade. In software valuations, revenue growth matters at least as much as profits growth. Sage looks very high risk to me - what's more, that's very much the market's view.

Hopefully it will work out for us both.

Can I suggest you start a Splunk thread if you wish to discuss its obvious merits.

27th Dec '21

Sage is showing some remarkable strength against a 'risk-off' market backdrop. Managed to hit a 52 week high on Friday 24th Dec (851.08p).

Only two Brokers out of 21 have share price targets above the current share price Jefferies on 900p and Numis on 870p.

It also appears to have risen sharply with the share volume traded decreasing over the latter few days. I'm no Charting expert but to my amateur eye that looks like a very bullish signal - but I'll defer to those better informed on this?

Perhaps the buy-back programme is now finding holders reluctant to part with their shares?

31st Dec '21

Well done, you have your answer. On today's 31 Dec close 852.6p and a twelve month view (582p) we have seen a 270.6p share price rise or 46.49% - a highly creditable performance.

Add-in the 17.37p of dividends received in the period and that makes for a 49.47% total return.

The question is now of course is whether to sell, hold or indeed buy more?

Wishing all holders a Happy and prosperous New Year !

LON:SGE a wise investment?

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Berksbee

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