Sage is the antithesis of the high-growth software stocks that have lifted technology valuations to the skies (Simon Duke writes). The developer of accounting tools likes to move at a steady pace and, unlike its racy peer group, is no fan of the empire-expanding takeover. Over recent years, it has even sold businesses deemed surplus to requirements.
The FTSE 100 group does other prosaic things, too, such as paying a dividend and cutting debts. Perhaps this is why Sage’s share price is not much different to what it was in 2016, while its rivals’ stocks have soared. To some, its careful approach displays admirable prudence; to others, a lack of ambition.
Sage had some cheer for investors yesterday. It revealed that revenues had grown by 1.4 per cent to £447 million between October and December, its fiscal first quarter. Recurring sales rose by 4.7 per cent to £408 million, of which software subscriptions were up 11.3 per cent to £303 million. The performance was solid enough, considering the pressures that the pandemic has piled on its two million small business customers globally — enough to lift its share price by 4.9 per cent, or 28¼p, to 601¼p.
Sage was founded in 1981 and initially sold CD-roms to small companies. In the past customers paid upfront for its software and then were charged an annual licence fee, but Sage has been trying to nudge them towards its cloud-based service, for which customers pay a regular subscription. The shift should create efficiency savings on all sides, as well as delivering predictable revenue streams, which the stock market prizes highly, yet the transformation hasn’t been smooth. Stephen Kelly, 59, hired in 2014 to accelerate the cloud transition, left abruptly in 2018. Steve Hare, also 59, is now in charge, having been promoted from finance chief.
The business employs 12,000 people globally, including 2,000 in Britain and Ireland, and has a market value of £6.5 billion. North America accounts for 39 per cent of its revenues, with the northern European business, which includes its domestic market, bringing in 22 per cent. Its main competitors are Xero, whose Australian-listed shares have risen nearly tenfold over the past five years, and Intuit, the $100 billion American business software goliath behind the Quickbooks accounting service. Intuit’s stock has jumped fourfold since 2016.
Under Mr Hare, Sage has slimmed down considerably. In 2019, it sold its payments wing for about £232 million and banked a further £78 million by offloading its American payroll outsourcing unit. It used the proceeds to pay off loans and invest in its cloud plans. Last month, it announced the sale of its businesses in Asia, Australia and Poland.
Subscription revenues account for 68 per cent of the total, up three percentage points since September, but the switch has come at a cost. In November, Sage said that it would increase research and development and marketing spending to accelerate growth in its cloud offering, knocking three percentage points off its operating profit margin. Yesterday, it reiterated that it “may flex the level of this investment” this year.
The move from desktop applications to the cloud is speeding up in all business software categories, so Mr Hare is right to be prioritising investment. Competition is fierce, with Xero and Intuit arguably ahead in this race. Sage has net debts of £129 million and churns out plenty of cash. The shares trade on a dividend yield of 3 per cent and income investors would not look foolish buying at present levels. However, those chasing capital gains should search elsewhere.
Advice Avoid Why Sage is cheap and its dividend looks secure but it may struggle for growth
Energean
When it joined the stock market, Energean produced only 2,800 barrels of oil per day, but it has come a long way since then (Emily Gosden writes). Boosted by acquisitions, production of oil and gas last year rose to the equivalent of 48,300 barrels a day and it is pressing ahead with projects intended to take it to 200,000 barrels per day within a few years.
The bulk of that increase is due to come from starting up Energean’s most important project, the enormous Karish gasfield off the coast of Israel, which is expected to produce its first gas by the end of this year. On the back of that development, Energean is targeting paying its maiden dividend in 2022.
Yesterday, however, Energean disappointed investors by saying that that first gas from Karish could be delayed by two to three months because of possible Covid-related problems in boosting manpower at the Singapore shipyard where the production vessel is being made. Mathios Rigas, 53, its chief executive, said that if delays did materialise, it would affect the amount rather than the timing of a maiden dividend.
Wider investor concerns about climate change have increased and exploration and production companies face existential questions, especially as Covid hastens a peak in oil demand. Energean likes to set itself apart from its peers in this regard because future production will be more than 70 per cent gas, which it argues is a “transition fuel” and will be sold largely under long-term contracts that Mr Rigas claims give it “very limited exposure to commodity prices”. While unabated gas isn’t sustainable in the long term, Energean says that in Israel it will help to replace more polluting coal-fired power. Energean has set net-zero targets for its own operations and is at least exploring the potential for carbon capture technologies, which could help to future-proof gas.
Tempus last recommended holding Energean shares in late 2019 at just over 950p. After tumbling to less than 300p when the pandemic hit, they have recovered most of their losses, albeit falling by almost 5 per cent, or 45p, to 877¼p yesterday. Despite potential Karish delays, they appear a solid prospect, for the medium term at least.
Advice Hold Why Dividend prospects and better climate stance than peers
