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Questor share tip: Sage downgraded to a hold

FTSE 100-listed accounting software group raises questions over growth with chief executive exit, says Questor

Sage takes wooden spoon as bid talk fades. UBS downgraded Sage to 'sell', arguing it is sceptical about the recent M&A speculation.
UBS downgraded Sage to 'sell', arguing it is sceptical about the recent M&A speculation.

Sage
399.5p-22.5
Questor says HOLD

THE announcement of a chief executive’s departure usually comes couched in impenetrable corporate double-speak and platitudes.

So when Guy Berruyer, the boss of accounting software provider Sage, told Questor part of the reason he had announced his intention to step down from the FTSE 100 company by the end of March was because he planned to climb Mont Blanc and ski the Haute route between Chamonix and Zermatt it made a refreshing change.

However, the concerns still persist. Mr Berruyer has become closely associated with returning revenue growth to 6pc in 2015 at the software company. His exit plans, which sent the shares 5.3pc lower yesterday, could mean that target will be missed.

Sage has been increasing revenue growth by changing the way it charges for its product. The company typically provides an accounting software system for an initial fee and then adds on charges for providing support to create recurring revenue.

Existing-client revenue was up 5pc in the first half to £657m, and the proportion of that which is recurring increased to 72pc of the total . The software group also improved its record of holding onto clients with the renewal rate rising 2 points to 83pc. Once a client has a computer system in place which carries out essential activities such as accounting and payroll, for instance, he or she is unlikely to go through an expensive and risky change. Analysts believe this dependency on Sage means the business can raise prices to boost its profits.

Sage is also moving to a subscription model of pricing instead of charging an upfront fee. Management expect this to improve the revenue visibility.

The balance sheet is strong, the free cash flow and earnings cover the dividend more than twice, and it offers a forecast yield of 3pc.

Questor recommended the shares last year (Buy, 373p, December 5) on the basis that the growth would see the shares re-rate. That is now in question so Questor downgrades Sage to hold.