The share price reaction to Sage Group’s full-year figures was an odd one, a fall of almost 5 per cent in opening trading, after which they recovered completely to end ½p up at 577p.
There are several explanations. Stephen Kelly, the chief executive for the past year, inherited some tough targets, to raise revenues by 6 per cent and margins to 28 per cent. There was a tiresome change to accounting policy, which meant that, although the targets were hit under the old basis, margins apparently undershot under the new one. That may explain, as the market digested this, the share price recovery.
The shares have come up from about 350p before Mr Kelly came on board, so some may have been taking the absence of any unexpected good news as an excuse to take profits early. Alternatively, the lack of any enhanced targets — Sage is looking for a repeat in the current year and talking vaguely of double-digit growth and margins ahead of 30 per cent at some later stage — may have been disappointing.
Or there was some combination of all the above. Mr Kelly set out his plans for the software maker in the summer, but the main objective is to raise the number of customers and to increase the proportion that pay by subscription, a more reliable source of revenue. Before he arrived, there was a sense that Sage had become slothful and complacent.
The product has been split between the Heritage and Growth ranges, the latter on which the R&D spending is going. Sage is pushing three main products. Sage One is for start-ups, has 173,000 paying subscriptions, doubled over the period and has been launched in Brazil, Malaysia and Australia. Sage X3, for larger companies, is growing strongly in North America, while Sage Live is the cloud offering. The company is to cut at least £50 million off its annual cost base by the end of this year, the savings to be invested in marketing and the like rather than enhancing margins.
Plainly, Sage has been turned around and is heading in the right direction. The concern is that at their present level the shares are heading back to dotcom boom levels. They sell on 22 times this year’s earnings, which looks to be anticipating an awful lot of that future growth.
Free cashflow £296m
£50m Expected costsavings this year
MY ADVICE Avoid for now
WHY The company has been remodelled to focus on the areas it is good at, but further progress may be slow and the rating is a high one
Another company that, like Sage, has set itself some challenging targets is Brewin Dolphin. The wealth manager has suggested that it will reach a margin of 25 per cent by the end of the financial year to the end of September, although at least there is the suggestion that, if this is not reached, it wouldn’t exactly be a resigning matter.
The reason is that the markets are not being helpful in attracting wealthy individuals to put their money into equities. Brewin Dolphin has shifted well away from its roots as a private client stockbroker and now offers the sort of discretionary services that its clients want.
Funds under management across the group fell by £500 million to £32.5 billion. Within the discretionary business, they actually rose by £800 million to £24.8 billion, helped by some transfers within the group. Brewin says it has ambitious plans to grow by offering more services, such as financial planning and taking on more staff, and it has the infrastructure in place in terms of IT and a regional network.
It has surplus cash that could be spent on acquisitions, despite prices for such businesses being high. The company is aware that it has overexpanded and been strapped for cash in the past, which probably rules out any immediate return to investors.
The imponderable remains the markets. The shares, up 8¼p at 265¾p, have been poor performers since the summer, along with the rest of the sector, and offer an attractive dividend yield of 4.8 per cent, selling on 14.5 times multiples. One to buy, unless you fear some precipitate market collapse.
PBT £62.2m
Dividends 12p
MY ADVICE Buy long term
WHY Company is well poised to grow its discretionary side
When a share price has risen by more than a fifth in a mere three weeks, there is always a temptation to take profits. I suggested before that Greene King’s purchase of Spirit Pub Company was at a very good price and a deal unlikely to be replicated soon in the pub sector. It seems to have taken the market a long time to come around to the same view.
I always expect the synergies forecast when such deals are announced to be exceeded in the event and Greene King has duly added another £5 million to £35 million. More is likely to come, while the benefits of supplying almost all Spirit pubs with its own product for only 17 weeks helped beer volumes to rise by 3.6 per cent in the half-year to October 18.
The market continues to be challenging, with customers hard to separate from their money despite the improving environment for consumer spending, although Greene King had the advantage of gearing up for the Rugby World Cup this autumn. The shares, up 111½p at 963p, sell on 13 times earnings for the first full year of Spirit ownership. Not demanding, but I might be tempted to take some money off the table now.
Revenue £615m
Dividend 7.95p
MY ADVICE Buy long term
WHY Company is well poised to grow its discretionary side
And finally...
Urban & Civic is a new vehicle for Nigel Hugill, a long-time property man who at Chelsfield was involved in Westfield London and Stratford City. Last year he reversed this into Terrace Hill and the company is working on three residential developments, in Cambridge, Rugby and Newark, all good London overspill locations where house prices should rise as ripples from the capital spread out. About two thirds of the plots it owns or controls have planning consent. The net asset value is currently just under the share price.
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