Sage Group : More defensive than ever
Fair Value 300p (price 248.80p) BUY vs. NEUTRAL
We upgrade to Buy from Neutral, whilst keeping our DCF-derived fair value at 300p. The stock today offers 21% upside potential following a 20% share price fall over the last three months, attributable to the near completion of the share buy-back programme and management’s slightly more cautious stance regarding the outlook. We consider Sage to be the defensive technology stock ‘par excellence’, which is set to deliver stable growth and outstanding margins.
US SME indicators are not so bad. North America accounts for 29% of Sage’s revenues. Whilst SME optimism in Europe has been subdued by the euro crisis – as shown in the last quarterly Sage Business Index published in late March 2012 – the monthly optimism index of the US NFIB (National Federation of Independent Businesses) gained 2ppt to 94.5 in April 2012. This was the best NFIB number seen since December 2007 and February 2011. This pent-up optimism in the US is corroborated by Intuit’s recent Small Business indices surveys.
- Crisis-proof business model. Sage made good progress in strengthening its defensive business model: 1). 67% of revenues are recurring (subscriptions); 2). 69% of customers have subscribed to higher value premium support contracts, with spectacular growth for this rate in the US (48% in H1 FY12 vs. 37% in FY10) and the UK (52% vs. 44%); and 3). Costs remain under control and Sage still has some buffers on opex in case of tougher-than-expected market conditions.
- Growth initiatives on the right track. We consider Sage’s growth initiatives (cloud computing, connected services, payments, premium support and acquisitions) to be progressing well, although this has not been visible to date.
- Attractive valuation. The stock is trading at est. 8.3x FY12 and 7.4x FY13 EV/EBIT multiples. The 12m forward P/E is a full 20-25% below its 2003-12 average (but 10-15% above the March 2009 trough).