Sage Group PLC (LON: SGE)

Sage Group PLC (LON: SGE) is an FTSE 100-listed Company engaged in providing business software and solution across North America, North Europe, Central Europe, Africa, the Middle East, Asia, and Latin America. The primary focus of the Company is to provide accounting services for mid-scale and small-scale companies. SGE’s products can be bifurcated into two broader categories – Cloud-connected & hybrid solutions and Cloud-native solutions.

On 13 May 2022, the Company will release H1 FY22 financial results for the six months ended 31 March 2021.

Recent trend of dividend payments

SGE had paid a final dividend of 11.63 pence per share attributable for FY21 on 10 February 2022, while the ex-dividend date was 13 January 2022. Thus, the full-year FY21 dividend came out to be 17.68 pence per share, an 2.50% increase on a YoY basis.

 (Data Source: LSE Website, Research done by Kalkine Group)

Growth Prospects

• Investments: SGE would continue to invest heavily in cloud-based platforms as most of the industries are seeking digital transformation during these challenging business conditions. SGE already witnessed a substantial shift as it has focused more on software as a service for the last two years with a strategic objective of becoming a SaaS company.
• Acquisition Benefits: On 17 January 2022, the Company updated that it had completed the acquisition of Brightpearl. Moreover, Brightpearl is a cloud-native multichannel retail management system for the retail and e-commerce vertical. This acquisition will strengthen the SGE’s growth strategy by broadening the value proposition for mid-sized businesses and expanding Sage's digital network.

Key Risks 

• Record UK Inflation: The annual rate of UK consumer price inflation reached 5.5% in January 2022, the highest since March 1992. Thus, it can adversely impact the London equities.
• Other Potential Risks: There are certain potential risks that can impact the business, such as cybersecurity & data privacy, third-party reliance, leveraging disruptive technology, inability to understand customer needs, execution of product strategy, failure to identify the value of data and live services management.
• Loss of Contracts: Since the Company works in a time curtailed industry, any delay in delivering the product could lead to loss of contracts and revenues.

Key Fundamental and Shareholders Statistics of Sage Group PLC.

BlackRock Institutional Trust Company, N.A., is the most significant shareholder as it holds nearly 62.68 million shares as of 31 December 2021.       

Trading Update (for the three months ended 31 December 2021 as of 26 January 2022)

(Source: Company Filings)

• Strong Recurring Revenue: The 21% rise in Sage Business Cloud revenue led to an 8% growth in recurring revenue to £429 million during Q1 FY22.
• Geographical Performance: The recurring revenue in North America rose by around 11%, Northern Europe increased by approximately 7%, and in international, it rose by around 5%, during Q1 FY22.

FY21 Financial Highlights (for the 12 months ended 30 September 2021 as of 26 January 2022)

(Source: Company Filings)

• Decent Top-Line Business: The Company’s annual recurring revenue witnessed a decent growth of around 8%, and operating profit showed a slight reduction of 8% during FY21.
• Disposal: SGE had completed the disposal of its Swiss business to Infoniqa on 30 November 2021.
• Cash Conversion: SGE had sustained a strong cash generation, with a underlying cash conversion of 126% during FY21.
  

 Financial Ratios (FY21)

Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

On 18 February 2022 at 11:40 AM GMT, SGE’s shares were trading at GBX 677.40, down by around 1.14% against the previous day closing price. Stock 52-week High and Low were GBX 862.20 and GBX 562.00, respectively.

On a daily chart, the stock price is sustaining between the lower Bollinger band and middle Bollinger band. Hence, there could be an uptick in the stock price in the near term. Also, the 14-RSI at around 27.70 indicates that the stock is trading in the oversold territory, which suggest trend reversal in the near term. Meanwhile, the MACD line has given a bullish crossover against the signal line, illustrating a bullish price momentum.

SGE’s stock has delivered a decent positive return of ~14.93% over the last one year. Also, it has outperformed the FTSE All-share Software & Computer Services Index with a return of negative 6.24% and the FTSE 100 index with a return of around 12.32%.

Valuation Methodology: Price/Earnings Approach (FY22E) (Illustrative)

Business Outlook

SGE witnessed robust demand for Sage Business Cloud solutions, which resulted in higher recurring revenue during the first quarter of the financial year 2022. Moreover, SGE demonstrated robust growth in cloud-native revenue through the acquisition of new customers. Meanwhile, in terms of revenue guidance, the Company had anticipated FY22 organic recurring revenue growth ranging from around 8% to 9%. Overall, the delivery of strategic objectives would bring recurring revenue growth, new customer acquisition, operational efficiencies, and SGE is well-positioned to capture future growth opportunities.

Considering the recent technological advancements, decent dividend growth, robust fundamentals, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Sage Group PLC at the current price of GBX 677.40 (as of 18 February 2022 at 11:40 AM GMT), with lower-double digit upside potential based on 30.32x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios. 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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