Sage Group Plc – Witnessed solid growth with a strong balance sheet

Sage Group Plc (LON: SGE) is a FTSE 100-listed provider of business software and solution in North America, North Europe, Central Europe, Africa, Middle East, Asia and Latin America.

On 20 November 2020, the Company will announce the full-year results.

Rationale for Valuation – Buy at GBX 706.80

• The Company has decent fundamental metrics as it has maintained a Net margin above 10% for the last three periods and ROE (return on equity) above 8% for the last two years.
• The Company expects recurring revenue growth of 7% to 8% and organic operating margin to be around 22% in FY20.
• In the last six months, the Company has delivered a sparkling return of ~15.74%, which is higher as compared to the FTSE 100 Index.
• From the technical standpoint, shares were trading well above the short-term support level of 200-day (692.70) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The Company operates in multiple geographies, and profits can be impacted negatively due to foreign exchange rate fluctuations.
• Being a Technology Company, SGE needs to invest heavily in innovation and system maintenance and, any failure to do so will impact the brand royalty and may affect the Company’s financial performance.

Recent News

On 27 August 2020, the Company stated that the Chairman, Sir Donald Brydon, has indicated his intention to retire from his role, and step down from the Board, in September 2021. The Board has also initiated a process under senior independent director Drummond Hall to search & hire his successor.

Trading Update (for the nine months ended 30 June 2020, as on 23 July 2020)

(Source: Company Website)

• Recurring revenue for the nine months ending 30 June 2020 surged by 9.0% year-on-year, driven by a software subscription growth of 22.6% year-on-year to £885 million.
• The Company saw growth particularly in North America, where recurring revenue increased by 11.3% to £474 million from £426 million in the prior year, as well as in the UK and Ireland, where recurring revenue also surged by 10.6% to £281 million from £254 million year-on-year.
• The Group’s total organic revenue saw an increase of 4.1% to £1,395 million in the first nine months ending 30 June 2020 from £1,340 million.
• In the third quarter of 2020, the recurring revenue increased by 6.5% to £421 million from £395 million prior year.
• The Group witnessed a strong balance sheet, with net debt of £226 million and cash and available liquidity of £1.2 billion.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company reported solid growth for the first nine months, with recurring revenue expected to grow around 7%-8% in the financial year 2020. The organic operating margin is expected to be approximately 22% for the financial year 2020. The Company has mentioned that there is a limited impact on the Group’s business on account of COVID-19. Overall, the sustained investment in Sage Business Cloud throughout the economic cycle will form a robust base for the long-term success of the Group. The stock made a 52-week low and high of GBX 515.60 and GBX 794.60, respectively.

Based on decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Sage Group at the current market price of GBX 706.80 (as on 16 October 2020, before the market close at 8:06 AM GMT+1), with lower double-digit upside potential based on 30.30x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

Greencore Group Plc – Saw an ongoing improvement in demand

Greencore Group Plc (LON: GNC) is an FTSE 250 listed Company, which manufactures convenience food in the UK. It supplies grocery retailers, supermarkets, and other retailers.

On 24 November 2020, the Company will announce the FY20 results.

Rationale for Valuation – Buy at GBX 95.70

• GNC has given a decent ROE of 7.3% in H1 FY20, which is ahead of industry median of 4.7%.
• The Company witnessed an improvement in trading performance, with an ongoing enhancement in demand for the products.
• It has a strong liquidity position, with an improvement in underlying cash generation.
• GNC has a strong balance sheet and improved free cash flow which would benefit the medium terms goals of the Group.
• From the technical standpoint, 14-day RSI stood at 36.28, which is supporting the upside movement.

Key Risks

• In the COVID-19, the Company increased reliance on online platforms, which need to be maintained properly to avoid cyber-attacks or frauds, failing to do so will deteriorate the reputation of the Company.
• The Group operates in highly competitive markets, which could adversely affect the Group’s results.

Trading Update (for Q4 FY20 and the full year ended 25 September 2020, as on 5 October 2020)

(Source: Company Website)

• In Q4 FY20, the Company witnessed a progressive improvement in revenue, adjusted EBITDA and cash generation, with an increase in demand for food to go categories.
• The pro forma Group revenue is expected to be 19% below prior-year levels but saw an improvement on the 36% reduction in Q3 FY. While the Company expects a reported revenue to be around £1,265 million.
• GNC has improved in Adjusted EBITDA in the final quarter and expects Adjusted EBITDA to be approximately £85 million in FY20.
• It has a strong liquidity position, with an improvement in underlying cash generation in the final quarter and total committed debt facilities of £578 million.
• The Company expects net debt to be approximately £345 million (excluding lease liabilities) at year-end.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative) 

Conclusion

The Company stated that it witnessed an ongoing improvement in demand for the products in Q4 FY20. In the light of COVID-19 disruption, the Company has taken several actions to ensure that GNC is well-positioned to build back the business. The revenue trends continued to recover through Q4 FY20. The Company is well placed in the growing UK food market. The Group is focusing on the growth, customer relevance and a distinctive way of working across the business. Greencore Group prospects appear to be decent, and it is a good opportunity to invest for the long term. The stock made a 52-week low and high of GBX 83.40 and GBX 282.20, respectively.

Based on decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Greencore Group at the current market price of GBX 95.70 (as on 16 October 2020, before the market close at 8:29 AM GMT+1), with lower double-digit upside potential based on 0.69x EV/NTM Sales (approx.) on FY20E sales (approx.).

*All forecasted figures and Peer/Industry information have been taken from Refinitiv, Thomson Reuters.

* Dividend Yield may vary as per the stock price movement.

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