Wednesday, 3 December 2014

Sage Group - Final Results

Sage is a global leader in the provision of business management software and services for small and medium sized businesses. Products include accounting and payroll, enterprise resource planning and customer relationship management.

Sage Group currently operates in many European countries, North America, South Africa, some N African and Middle East countries, Australia, New Zealand, Malaysia, Singapore and most recently Brazil.  Sage has continued to grow its business both organically and via acquisitions and currently has over 6 million customers worldwide and a market cap over £4bn

Sage has set itself the goal of growing organic revenue at 6% a year in the medium-term, with increasing profit margins and hence even faster growth in profits.


The Company today announced final results for the year to 30th September 2014 (link via Investegate).Organic revenues increased 4.9% to £1.3bn, underlying earnings were up 8% at 22.69p and adjusted dividend is up 7.1% at 12.12p (rebased).  The dividend for the year is covered 1.9x by underlying earnings per share.  They are on track to deliver organic revenue growth of 6% in 2015 combined with 28% operating profit margins.
Sage announced a strong acceleration in adoption of Sage One - their cloud solution for smaller businesses. It is now present in 10 markets and approx.150% increase in paying subscriptions to 86,000 (2013: 35,000), driven by strong run-rates in the UK & Ireland and South Africa.

Commenting on the results, new CEO Stephen Kelly said:  “Our financial performance demonstrates the strength of Sage's global business and the quality of relationships it has with millions of SME customers worldwide.  Looking ahead, I believe that Sage, as a trusted partner to our customers, can be even more instrumental in supporting the success of SMEs around the world. I look forward to building on Sage's technology leadership, both in the cloud and on-premise, together with our outstanding customer support, to the benefit of our current and future SME customers."

For investors, the best thing about Sage is that it generates a lot of cash, and it likes returning that money to shareholders. The Group remains highly cash generative with cash flows from operating activities of £382m. They propose to pay a final dividend of 8.0p in March 2015.

I particularly like businesses with high barriers to entry - Warren Buffett calls these ‘moats’. I believe Sage is such a company - once a customer has a computer system in place that carries out essential activities such as accounting and payroll, for instance, they are unlikely to go through the expensive and risky process of changing it. Analysts believe this dependency on Sage gives the business the ability to increase prices and boost profits/dividends further.

Sage was added to my ISA portfolio around a year ago at 369p. Today's results have been well received with the share price up over 4% at 422p and yield of 2.9%.

Sage was the very first share I purchased in what was known as a single company PEP some 20 years back. I sold it at a handsome profit a few years later leading up to the dot-com bubble. I am pleased to return to holding this as an income investor many years later. There is always a degree of uncertainty following management changes at the top, but I am encouraged by progress made under the new team and happy to continue holding this leading software provider

As always, please DYOR.

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