Sage Group PLC

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

On 14 June 2021, SGE has scheduled its annual general meeting.

Investment Rationale – BUY at GBX 652.20

• Increased level of customer acquisition and continued recurring revenue growth (annualised recurring revenue surged 4.2% yoy in H1 FY21) shall create significant value for shareholders.
• Expanded sage ecosystem, FY21 revenue growth guidance, operating efficiencies, sustained dividend policy, and resilient balance sheet, underpins strong trading momentum to accelerate growth and capitalise on opportunities lying with increasing adoption of digital solutions.
• From a technical standpoint, 51-day EMA (GBX 637.40) suggests an upward trend in the stock price, while the 14-day RSI (51.68) gives a neutral signal.
• Over the past two years (H1 FY19 to H1 FY21), gross margin and net margin have remained above the industry median of 82.3% and 11.0%, respectively.

Key Risks

• Failure to deliver cloud-native products and solutions can impact their commercial goals.
• The Covid-19 led challenges can impact new customer acquisition.
• The Company operates in multiple geographies, and profits can be impacted negatively due to foreign exchange rate fluctuations.

Recent News

Disposal: On 1 June 2021, SGE announced that it had completed the disposal of its Asia and Australia business (excluding global products) on 31 May 2021, to The Access Group.

Financial Highlights (for the six months ended 31 March 2021, as on 14 May 2021)

 (Source: Company Website)

• Sage demonstrated strong trading momentum during H1 FY21 as
  • Organic recurring revenue surged 4.4% year-on-year (yoy).
  • The operating margin remained strong at 20.2%, in line with expectations.
  • With an underlying cash conversion of 133%, the Company sustained robust cash generation.
• At the end of H1 FY21, the balance sheet remained strong with approximately £1.4 billion of cash and available liquidity, and net debt to EBITDA of 0.2x.
• The interim dividend increased by 2% to 6.05 pence, in line with dividend policy.

Share Price Chart

   (Research done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion

We have reiterated the BUY guidance following a strong performance in H1 FY21. For FY21, Sage expects to generate organic recurring revenue growth of 3% to 5%. The organics operating margin can be slightly below the FY20 level with additional strategic investment. However, margins shall improve beyond FY21 with additional investment drives. The stock made a 52-week high and low of GBX 774.40 and GBX 543.20, respectively.

Based on the strong trading momentum, robust cash generation, continued recurring revenue, FY21 revenue guidance, sustainable dividend policy, and favourable valuation conducted above, we have given a “BUY” recommendation on Sage Group PLC at the current price of GBX 652.20 (as on 8 June 2021, at 9:15 AM GMT), with lower double-digit upside potential based 35.65x Price/Earnings (approx.) on FY21E Earnings Per Share (approx.).

Royal Mail PLC

Royal Mail PLC (LON: RMG) is a FTSE 100 listed Courier Company that provides postal services.

On 21 July 2021, RMG has scheduled its annual general meeting and trading statement.

Investment Rationale – EXPENSIVE at GBX 599.40

• The parcel boom induced by the increased online shopping strengthened the Royal Mail; however, the stock seems overstretched to take fresh positions while the letter volumes can be impacted by the economic downturn.
• The medium-term outlook is highly uncertain due to increased Covid-19 induced costs, reduced consumer spending, and Brexit.
• From a technical standpoint, 14-day RSI (72.77) indicates an overbought signal while the stock is hovering around the upper standard deviation of the Bollinger Bands.
• Since FY18, gross margin and operating margin have remained below the industry median of 50.8% and 6.6%, respectively.

Key Risks

• Failure to control the increasing cost could result in a loss of profit and market share.
• Macroeconomic uncertainties and underlying structural changes in the consumer behaviour can reduce letter volumes.

Financial Highlights (for the year ended 28 March 2021, as on 20 May 2021)

 (Source: Company Website)

• Driven by strong parcel growth, FY21 performance surpassed the initial expectations.
• With equal contribution from Royal Mail and GLS division, Group adjusted operating profit jumped 116% yoy in FY21.
• Trading cash flow remained robust at £762 million (FY20: £556 million).
• The Company sustained the progressive dividend policy with FY21 dividend per share of 20 pence. The final dividend per share of 10 pence is likely to paid on 6 September 2021, subject to approval at the annual general meeting.

Share Price Chart

 (Research done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative)

Conclusion

The Royal Mail topped the 52-week high in the last trading session, while the Company stated that FY21 contains several uncertainties that could significantly influence volumes. Therefore, the Board refrained from providing any specific guidance. Although there are grounds for optimism, overstretched share price scenario and increase Covid-19 associated costs can lead to price retracement in the short-term. Hence, it is not advisable to take fresh positions as of now. The stock made a 52-week high and low of GBX 613.80 and GBX 151.33, respectively.

Considering the challenging trading environment, macroeconomic uncertainties, overstretched price position, and unfavourable valuation conducted above, we have given a “EXPENSIVE” recommendation on Royal Mail PLC at the current price of GBX 599.40 (as on 8 June 2021, at 8:33 AM GMT), while it would be interesting to see how RMG would respond to lockdown reopening.

*All forecasted figures and Industry Information have been taken from REFINITIV.

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

*The reference data in this report has been partly sourced from REFINITIV.

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