Stephen Kelly, the chief executive of Sage Group, our biggest provider of software, since the end of last year, is keeping his counsel on where he wants to take the business, although a long-awaited capital markets day that should make this clearer takes place next month.
Nevertheless, he has begun to make his mark. There have been some new hires, while the chief executives of Europe and the Americas are leaving, the latter immediately. There have been organisational changes, too.
The main task, though, is clear enough. Sage had become sluggish and slow-moving — there was even a share buyback to investors, which might seem odd for a tech business. Mr Kelly needs to kick revenues and earnings growth into another league.
The company has some stretching targets to grow revenues in the present financial year by 6 per cent and reach margins of 28 per cent. This looks achievable; revenues actually grew by 6.2 per cent in the first half to the end of March, although there were some one-off factors here and the underlying rise was closer to 5.8 per cent.
Mr Kelly needs to increase the proportion of revenues coming from subscriptions. This more reliable form of revenue rose by 29 per cent halfway. He needs, too, to raise the proportion of customers taking Sage One, its cloud service for smaller, high-growth businesses. Finally, he must get to grips with the American operations, parts of which, such as payment services and sales to those smaller businesses, are lagging behind, despite growth in those markets.
The share buybacks have been halted. With the price at 536p, up 39½p, Sage does not see this as a good use of shareholders’ money, instead preferring to plump for infill acquisitions.
These are not without risk in the software sector, historically, while any attempt to change direction will always bring uncertainty, a point made explicitly by Sage yesterday. This suggests that progress may be slow. The halfway dividend is up by 8 per cent to 4.45p, though the yield is below 3 per cent. The shares, up 39½p at 536p, sell on 21 times’ earnings.
Given the uncertainties, and their rise from about 350p in the autumn, some profit-taking might be in order.
73% Proportion of all revenues recurring
Revenue £682m
Dividend 4.45p
MY ADVICE Take profits
WHY Shares have come up a long way and offer a good return. There is always execution risk in acquisitions and in any change of strategy
Direct Line Insurance says that it is too early to call a turn in the motor insurance market, but analysts are encouraged after some positive noises from elsewhere in the sector. As it is, the insurer is keeping up with the market. It pushed rates up by 3.6 per cent in the first quarter; claims inflation is running at 3 per cent to 5 per cent across the industry. Likewise, its home insurance side is also keeping pace with challenging conditions.
Direct Line has the advantage of having undertaken massive cost-cutting since the 2012 float, costs to fall to £900 million or so this year. The combined operating ratio, the measure of the group’s profitability, should come in little-changed from last year’s 95 per cent. This means that the flow of dividends, the reason for holding the shares, is secure. Investors will get 27p or so shortly in a one-off payment.
The insurer also pays out any excess capital that piles up as special dividends, on top of its regular payments. This makes assessing the yield hard; the shares, up 2½p at 316½p, probably will pay out, excluding that one-off, about 6.6 per cent this year. That income remains a good reason to hold them.
Total costs in first quarter £220.7m
MY ADVICE Hold
WHY Dividend yield is among the best in the sector
Anyone who took my advice over the period and tucked away DS Smith shares will not have been sorry. They were trading well below a quid five years ago; they edged down 4¼p to 344p after a reassuring trading statement for the April end of the financial year.
Packaging is an unglamourous business seen as a proxy for macroeconomic trends and the amount people buy, but it is actually a dynamic market. The more vicious the supermarket wars get, the more they need to work with businesses such as DS Smith to gain the slightest edge for their products.
The European industry is consolidating — the company has made five purchases in the past few years. This drives up the margins it can get by providing cost savings, while the big retailers and consumer groups would rather source their needs from larger suppliers.
The benefits from the last big deal, SCA, of Scandinavia, have ground through, while the latest, the ¤300 million purchase of Duropack in southeastern Europe, will complete early in this financial year.
The one factor DS Smith can do nothing about it the weakness of the euro, getting 65 per cent of its revenues from the eurozone, and of the Polish and Swedish currencies. This inevitably will reduce reported profits, but it has no effect on how the business operates and sources within those markets.
The company is continuing to gain market share, with second-half revenue growth ahead of the 2.3 per cent reported in the first. The shares sell on less than 13 times’ earnings and remain a long-term buy.
Proportion of revenues in euros 65%
MY ADVICE Buy long term
WHY DS Smith’s record for growth is outstanding
And finally . . .
As the oil price continues to recover, there are signs that investment in the Middle East may be holding up better than expected. After good news from Lamprell the other day, Gulf Marine Services, which floated in March, said that fleet utilisation is running at 95 per cent, with rates being maintained. Though there is little investment in new projects, operators are keen to get as much as possible out of existing ones and the Abu Dhabi National Oil Company has said it is investing £25 billion over the next five years.
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