I have been a fan of multinational enterprise software company Sage Group (SGE) for a while now. However - as I observed in a piece here last year - the reason I bought the stock was based on my hope of seeing it return to the 800 pence share price level it achieved during 2018 and 2019. We are nowhere near there yet, so is there still plenty of reason to be optimistic or not?
There have been plenty of changes in the broader world over the last fifteen months, but also material ones in the multinational enterprise software business. Whilst some businesses have gone bust, there have been many started too. But the biggest change - as I have talked about before with Sage Group - is the rise and rise of recurring cloud revenues. Over the last couple of years this has been a big change for the group, but for it to be a successful company in the 2020s it is a smart one. The good news is that latest first half numbers said that the recurring revenue format is now apparent for over 90% of its income. Even better news in the current changing world is that over 60% of revenue is now centred also on a cloud basis. Like it or loathe it, both metrics are going up to nearly 100% over this decade.
It does cost some money for Sage to make the shift. First half profit was just over £190 million but was down 11% year-on-year. But it is a smart shift and it will get the benefits from doing it relatively early over the next few years. It can already see some cash flow benefits from this and I note it edged up the first half dividend payment. The free cash flow yield is sustainably running above a 5% rate and given net borrowing is now below £100 million, it is no surprise that it is currently looking to buy back £300 million (equivalent to 4.2% of its market cap) of shares. Meanwhile, new sales growth - which it anticipates at 3-5% this year - is being driven by the US and Northern Europe, as a recent hire of an ex Microsoft employee appears to be helping the cloud push. I also note its ‘Boss It With Sage™’ push which is worth watching on the internet if you get the chance. That sort of approach matters for attracting younger business starters.
Sage Group shares might be on a full year EV:ebit multiple of about x17 which is not overtly cheap I agree, even if it does look attractive against the average cloud-focused business. However for me - and a major differential against the average cloud heavy focused business out there - is that the free cash flow yield is running at 5-6% and (helped by having very limited debt) it is returning all this money via dividends and buybacks. Put it all together and I can see why Sage Group shares should get back to the 800 pence level, based this time on a lot more than just hope. Despite a good share price reaction to the results, still a Buy.
Filed under: Sage Group, Kefi Gold & Copper, Simec Atlantis Energy, Accrol, Forterra, Zoetic, Eurasia Mining
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