ii view: annual results send Sage shares up 18%

A Newcastle headquartered software company investing in AI and with an enviable dividend track record. Buy, sell, or hold?

20th November 2024 11:34

Keith Bowman from interactive investor

Full-year results to 30 September

Total revenue up 7% to £2.33 billion
Adjusted operating profit up 21% to £529 million
Final dividend of 13.5p per share
Total dividend for the year up 6% to 20.45p per share
New £400 share buyback programme
Net debt up 32% to £738 million

Chief executive Steve Hare said:

"Sage has delivered another successful year, achieving strong, broad-based revenue growth together with significantly higher profits and cash flows. We also invested further in our products and continued to execute well against our strategic priorities.”

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ii round-up:

Accounting software provider Sage Group (The) (LSE:SGE) today alleviated fears about slowing growth as well as boosting shareholder returns via a new £400 million share buyback programme.

Fourth-quarter organic revenue to 30 September rose 9.2%, up from 8.9% in the prior third quarter, leaving annual sales up 7% to £2.33 billion. That helped drive a 21% increase in adjusted operating profit to £529 million. A final dividend of 13.5p per share takes the total payment for the year up 6% to 20.45p, with the payment having increased consecutively for more than 20 years.

Shares in the FTSE 100 company rose 18% in UK trading to a record high, having come into these latest results down 8% year-to-date. That’s in contrast to a 3% gain for US rival and owner of QuickBooks, Intuit Inc (NASDAQ:INTU). The FTSE 100 index itself is up 4% this year.

Sage’s accounting and payroll solutions software is used by millions of Small and Medium sized Enterprises (SMEs) around the world.

Sales of Sage software located at datacentres or in the Cloud rose 16% year-over-year to £1.87 billion. Other customers continue to use desktop located software.

Accompanying management outlook comments pointed towards expected organic revenue growth of 9% or more over the year ahead. Operating profit margins are expected to trend upwards.

Broker Morgan Stanley reiterated its ‘overweight’ stance on Sage shares post the news. A first-quarter trading update is likely mid-January.

ii view:

Started in 1981, Sage today employs around 11,000 people. Headquartered in Newcastle, North America generated its biggest slug of sales over this latest financial year at 45%. That was followed by the UKIA region, comprising Northern Europe (UK & Ireland) and Africa & Asia Pacific, at 29%, with European sales the balance of 26%. Sage’s strategic focuses include building its cloud-based business and expanding its diversity beyond financial accounting.

For investors, elevated borrowing costs for its base of SME customers could see some of them not surviving current economic difficulties. Costs such as National Insurance contributions have risen in the UK, adding pressure on SMEs. Competition from Intuit and even other business admin software providers such as Workday is not to be ignored, while a forecast one-year price/earnings (PE) forecast sat above the 10-year average may suggest the shares are not obviously cheap.

More favourably, success in growing its cloud-connected customer base continues to be seen. Investment in AI powered services is being made. A diversity of both product and geographical region exists, while more than 20 years of consecutive annual dividend increases leave the shares on a forecast dividend yield of close to 2%.

For now, and despite ongoing risks, this generally well managed UK tech company looks to remain worthy of its place in many already diversified investor portfolios.

Positives:

Product and geographical diversity
Progressive dividend policy

Negatives:

Uncertain economic outlook
Subject to currency movements

The average rating of stock market analysts:

Strong hold

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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