US Edition Sage
373p+25½
Questor says BUY
SAGE, the FTSE 100-listed software company, said that growth was ahead of expectations yesterday, sending shares soaring 7pc higher.
On first look the numbers were dismal, with pre-tax profits down by a half to £164m in the year ended September. However, the bulk of this fall was due to a loss of £188m recognised on the disposal of assets. The underlying picture is much better, with operating profits up 2pc to £376m.
For investors, the most eye-catching number was the cash generated from this operating profit. Operating cash flow increased by £33m, to £417m for the full-year. That is interesting because Sage likes to return cash to shareholders.
In the year just ended, the company returned £572m to investors by way of dividend, special dividend and share buybacks. Chief executive Guy Berruyer said he doesn’t expect that to be repeated in the current year.
That doesn’t matter, because returns will still be healthy. Mr Berruyer said the 11.32p full-year dividend will continue to grow by 6pc a year, and it currently has a forecast yield of 3pc. Share buybacks will also boost returns. Darren Fisher, acting chief financial officer, said that the spare cash will continue to fund the buyback programme at around £130m a year on Questor’s estimates, or 11p per share. Steve Hare will join the Sage board as chief financial officer from January 3.
Sage was growing revenue at 2pc last year and the implied growth rate in the last six months was 5pc. Mr Berruyer reaffirmed his long-term target of 6pc. That leaves the shares, trading on 14.4 times forecast earnings, falling to 13.1 times next year, looking fairly cheap.
The consensus earnings estimates that underpin those price/earnings ratios are also pretty conservative, with revenue growth of only 2pc in 2014 and 4pc in 2015 pencilled in. The balance sheet is strong, the free cash flow and earnings cover the dividend more than twice, so this looks like a handy place to park some cash. Buy.
Watch Questor Editor John Ficenec discuss shares to profit from the Santa Claus share rally in December: