The outlook for Sage Group has been a hot topic among analysts since its annual results last week, firing up the share price to a record £11.30 before it eased back again, albeit slightly. The stock closed up again yesterday.
You need only look at the numbers to see why. For the year to the end of September, the accounting, human resources and payroll software provider, which boasts nearly half of Britain’s small businesses on its books, said its subscription income (known as annualised recurring revenue) had risen by 11 per cent to £2.2 billion. It reported that underlying profit before tax had increased by 20 per cent to £424 million.
Meanwhile, the penetration of its Sage Business Cloud offering rose from 75 per cent to 84 per cent, hooking more customers into the Sage network, while accountancy firms have flocked to the Sage for its Accountants package. Profit margins were reported at 20.2 per cent, suggesting that rivals are being kept at bay.
Does that all portend continuing bounty, or is this as good as it gets?
While the bulk of Sage’s income comes from the United States and Canada, the measures announced in Jeremy Hunt’s autumn statement mean that many smaller British businesses will gain from higher tax write-offs on investments and will want to offset the raised national living wage. Sage should benefit on both counts.
Steve Hare, the group’s chief executive, said that America “continues to be resilient”, while in Britain there was strong momentum, although he added: “We’re hopeful that the environment will continue to be strong, to encourage investment, because that’s what small businesses really need to do. We expect organic total revenue growth in the 2024 financial year to be broadly in line with 2023.” That suggests growth in Europe is still elusive.
Jefferies sums up the uncertainty among analysts, envisaging scenarios that could take the shares anywhere from 720p to £16.20. At the lower end, the investment bank frets about increased competition catching up on Sage, but in the best case it sees research and development driving stronger growth, backed by higher sales from cross-selling, upgrading and reactivating ex-customers.
Bank of America Securities is perhaps Sage’s biggest fan, seeing more customers, stronger customer loyalty, higher prices, higher margins and a low share value compared with rivals. Toby Ogg, at JP Morgan, believes the company’s Intacct product holds the key to progress as more small businesses in America, Europe and elsewhere realise the benefits of a computer program that can crunch raw sales and cost data into whatever form the customer needs, backed by user classes and forums.
The bear argument is that Sage is beginning to mature, growth is likely to taper and competitors are circling. Johannes Schaller, of Deutsche Bank, argues that momentum is slowing, noting that while North America has continued to outperform, the UK and Ireland, as well as Europe, have been slower. Canaccord Genuity claims there is an increased risk of organic recurring revenue growth slowing to no more than high-single-digit percentages, which could lead to a derating of the shares.
The latest figures were sweetened by a £350 million share buyback, as there were no takeovers to spend the money on. That may signal a change from the tempting view that the money is always better employed in the business.
Artificial intelligence could fuel another growth phase. A tour around Intacct reveals a few mentions of AI and Sage is testing a digital assistant to “deliver real game-changing benefits for small to mid-sized businesses”. That could be transformational, but the impact is hard to quantify.
In August last year, this column recommended the shares at 932p, as that price did not appear to reflect the full benefits of a subscription business model in a growth market. They are above £11.20 today.
JP Morgan sees Sage’s adjusted earnings per share rising from 31.76p to 48.32p over the next three years, taking the price-earnings ratio down from 31.4 for the year just ended to 20.6 for 2025-26. That would imply annual earnings per share growth moderating from last year’s 24.8 per cent into the mid-teens.
The company increased its annual dividend by 5 per cent to 19.3p this time, equivalent to a 1.9 per cent yield at the present price, and that should grow to 2.2 per cent for the 2025 financial year. Not quite an income stock yet, but veering toward the value stock category.
Advice Hold
Why A maturing business that could be rejuvenated by AI
Young & Co’s Brewery
You have to hand it to Clive Watson. No stranger to selling pubs, he has extracted a pretty price for his Aim-listed City Pub Group, persuading Young & Co to pay £162 million for 42 mainly freehold pubs from East Anglia to Wales, an average of £3.85 million each.
Naturally, Simon Dodd, Watson’s counterpart at Young’s, was quick to claim that the deal would be earnings-enhancing in the first full year in which the two companies are together, which is the 12 months beginning next April. However, that requires some heroic assumptions about savings from synergies, bulk-buying and combining head offices — set against an unpromising backdrop as the group’s younger, affluent customers struggle with higher rents and mortgages.
Despite its name, Young & Co’s Brewery has not brewed a drop of beer for 12 years. Instead, it presides over 220 pubs in London and more well-off parts of southern England, many with bedrooms and/or roof terraces, while outsourcing beer production to Marston’s.
For the 26 weeks to October 2, Young’s reported a 12 per cent increase in adjusted pre-tax profit to £28 million on revenue 5.4 per cent better at £196.5 million, compared with the same period last year. Like-for-like sales in central London were 8 per cent higher, partly because customers traded up to cocktails. The interim dividend grew from 10.26p a share to 10.88p, though half-year basic earnings per share slipped from 32.66p to 29.75p.
The real benefits of the City Pubs deal are the extension of Young’s geographic coverage and the increase in its bedroom tally by 29 per cent to 1,065. But in the short term, it will have to absorb the national living wage increase and the impact of continuing high interest rates on customers’ mortgages.
Douglas Jack, at Peel Hunt, sees adjusted and fully diluted earnings per share taking a slight dip to 59.7p this year, then rising to 66.5p for the year to March 2026. That would equate to a 16.3 price-earnings ratio at the present price.
Advice Hold
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