As a snapshot of the state of the economy Sage, which supplies accountancy software to more than 5m small and medium sized companies, is not a bad guide. And so far it is seeing no signs of recovery in its markets.
It has just reported full year profits of £307.5m, down 2% but in line with many broker expectations. Cost cutting and a weaker pound helped outweigh tougher trading conditions to a degree, but chief executive Paul Walker said:
At this stage we are not yet seeing a general recovery in our markets. Therefore we will continue to manage our cost base prudently while ensuring the business is well positioned to take advantage of the future economic upturn.
The results have provoked a mixed reaction from the analyst community. Panmure Gordon stuck with its buy recommendation, with George O'Connor sounding nothing short of effusive on the company's prospects:
Final results, as expected, are in line with consensus expectations – with net debt a bit better and US growth also a bit better than expected. Otherwise Sage is performing in line – this is a company that you could set your watch by. Despite a difficult economy there were 245,000 customers added and revenue was down 5%. Sage says that it is not seeing a general recovery in the market – common with other companies, it is not calling the turn – but pleasingly does not describe the market as challenging.
Why do we like Sage? Good experienced management, strong industry position, sound financials and a company which should be an attractive acquisition target. Sage has a defensible business model, with 65% of revenue from services that are in the main based on recurring maintenance - and customers moving to premium contracts (software and support). This is a well established business, with a global customer base of over 5.8m. At each turn we are impressed by Sage's new avenues and the consistent moves to increase customer wallet share, as its builds a suite of business software around its customers.
In our view, 2010 should see Sage return to M&A bringing nonorganic revenue back on the agenda. In addition we see 2010 consensus estimates as being too low. The valuation is attractive at 11.7 times and the business continues to throw off cash. Buy.
Investec however was a little less enthusiastic. The broker said:
Profits were around 2% below our estimates with management taking pro-active cost actions to counter declining sales. Annualised cost take-out has increased to £53.9m (£49.3m the first half of 2009) but some is being reinvested in the business. Combined with no general sales recovery, this may result in any P&L gearing being further off than some will have hoped.
UK and European profits were slightly below our forecasts while the US was marginally higher. We are encouraged that that US profits held up in the second half of 2009, despite the challenges the group is facing in this geography. We see the business as being well managed in what are
challenging markets. The stock has underperformed the sector on a 1, 3 and 12 month basis, and the valuation is not demanding, in our view. If there is material weakness in the stock, we would be inclined to turn more positive. For now, however, we maintain our hold stance.
And Seymour Pierce went to the other extreme. Over to analyst Derek Brown:
Headline results look a little light compared to our forecasts and the consensus mean. Closing net debt was higher than expected, negatively impacted by currency, at £439m (versus our £412m).
As expected the performance in the North American mid-market software business was dire, with software and software related services revenue down 23% year on year (constant currency); the US operations were helped by an improvement in the healthcare margin. Worryingly, the subscription revenue in the US also declined (-2%). Also of concern is that UK software sales fell 19% and the margin declined by 100 basis points. These rates of decline suggest a deterioration in the second half. The outlook statement offers little solace: stabilisation but no sign of recovery. We retain our sell rating and 183p target price.
However Sage shares are currently 4.7p higher at 219.4p.
