Sage Group
Phase one of the transformation of Sage Group under Stephen Kelly, chief executive since November 2014, is over. Phase two began at the start of the financial year on October 1 and will continue through the year. There is apparently no phase three, except “business as usual”.
Progress was evident with the software company’s full-year figures. The aim has been to shift to more reliance in revenues from subscriptions to its products, which is more reliable — or “sticky” in the jargon — and away from one-off sales and licensing.
So recurring revenues were up by 10.4 per cent, the fastest growth for a decade, and account for 70 per cent of the total, a proportion that has been growing steadily. The number of subscribers, 842,000 at the halfway stage, has topped a million. With this has come an inevitable fall in revenues from those one-off purchases, down by 8.5 per cent.
The second prong of the strategy is to build on the new cloud-based products, Sage One and X3, while allowing customers of existing ones to switch to the cloud where appropriate. Progress here, harder to measure, has been slow and accounts for only between £15 million and £20 million of Sage’s total sales of £1.5 billion-plus.
The third element has been efficiencies, which took £51 million per year off costs. Phase two will involve the launch of new products into areas where they are not yet available and an attempt to raise the Sage brand among the small and medium-sized businesses that are its customers.
Organic growth of 6.1 per cent came in slightly above target and another 6 per cent at least is forecast for this year. Operating profit margins are above 27 per cent and are projected to stay there.
So far, so good, then, and Sage has a wide enough spread of business to weather any Brexit storms. The shares have been weak recently for no apparent reason. Those organic growth targets look safe enough, but future progress may require further technological innnovations and progress with the cloud products.
The shares fell 18p to 657½p. They sell on 23 times’ earnings, about par historically, and at least offer a degree of relative stability for a technology investment.
My advice Buy
Why The shares are not cheap but further organic growth looks guaranteed and the new suite of products will start to contribute to profits
Britvic
A grand total of £240 million is a lot to pay on improving a supply chain and upgrading production, but that is how much Britvic is pledged to spend over three years. Not only will the investment mean cost savings but also the flexibility to switch between whichever of its brands is doing well at any given time.
Britvic is not getting a lot of help from some of its end markets in its efforts to upgrade the business. Its carbonates division in Britain is continuing to gain market share and it raised volumes by 4.8 per cent and revenues by 5.3 per cent in the year to September 30, an impressive enough performance. France, though, remains a dull market because of ebbing consumer confidence and poor weather.
In the UK still drinks division, some consumers did not like the shift to low-sugar Robinsons cordials, while the Christmas versions of J2O also failed to find favour. A 7 per cent fall in revenues was rather worse than the market, although this, too, was in decline.
Britvic seems as well insulated as any to a crackdown on overly sweet drinks, with the results of the government’s consultation expected next week and higher taxes on the worst offenders likely. Pricing remains challenging, while input costs for materials such as juice and sugar are rising, and this year is going to be challenging again. Britvic shares have been under pressure since the spring, but yesterday they rose 23½p to 571½p. Even an earnings multiple of 12 times does not recommend a purchase.
My advice Avoid
Why The next year or more look set to be difficult
Biffa
Given that the company floated little more than a month ago, there will have been few surprises in Biffa’s interim results. The share support mechanism put in place at the time of the IPO is over and it is clearer just what the market is valuing the shares at. Up 1¾p at 177p, they rest below the 180p issue price.
The main reason for holding the shares is the prospect of further acquisitions for the side that collects waste from businesses. A small deal has just been completed and the savings from such are clear enough, taking out back-office costs and using the same fleet to service more customers. Biffa has spent more than £50 million over the past three years on 21 such deals and, with a mere 9 per cent share of that market, more must be in prospect.
The energy business, generating power from landfill gas, is in slow decline and is dependent on energy prices that are rising at present. The shares sell on a fair 11.5 times’ future earnings and yield about 3.5 per cent, on the assumption that a third of earnings will be paid. The long-term story is positive, but there seems no reason for immediate outperformance.
My advice Avoid
Why The shares will take time to make much headway
And finally...
It isn’t exactly in the same league as the £336 million purchase of Hope Construction Materials, which was completed in the summer and kicked Breedon into a different league, but the company continues to add to its regional network with the £15.7 million purchase of Sherburn Minerals, a business spreading across the north of England. The latest trading update is positive: such additions bring with them clear cost savings and those from Hope are said to be coming through earlier than expected.
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