SageGroup PLC – Anticipating organic recurring revenue growth for FY21, following a strong performance in FY20.

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.

Investment Rationale – Buy at GBX 598.67

• From a technical standpoint, 14-day RSI (34.87) is supporting the upside potential.
• In terms of trading multiples, EV/Sales, Price/Earnings, and Price/Book are lower as compared to the corresponding multiples of the technology industry.
• During the past four years (FY16 to FY20), revenue and gross profit grew at a CAGR of ~10.7% and 16.3%, respectively.
• It has sustained investment in Sage Business Cloud for long-term success.
• Looking beyond FY21, Sage expects margins to trend upwards over time, as the investment drives recurring revenue growth and operating efficiencies.

Risk Assessments

• 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.
• Being a Technology Company, the 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.

Financial Highlights for the year ended 30 September 2020 (as on 20 November 2020)

(Source: Company Website)

• Sage continued the strong momentum with 8.5% growth in organic recurring revenue, while 90% of total revenue is now recurring.
• Due to ongoing investment in the business, the organic operating margin stood at 22.10%.
• The Company also sustained solid cash generation, with underlying cash conversion of 123%.
• The balance sheet also demonstrated resilience with the liquidity of nearly £1.2 billion in cash and net debt to EBITDA ratio of 0.3x.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Despite the uncertain economic backdrop, Sage expects FY21 organic recurring revenue growth to be in the region of 3% to 5%, weighing towards H2 FY21. Meanwhile, the organic operating margin is expected to be up to three percentage points below FY20, which might vary depending on the level of additional investment. 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. Moreover, it remained committed to investing for the long term to reshape the product portfolio and reposition the Company strategically. The Company has mentioned that there is a limited impact on business through COVID-19 pandemic. The stock made a 52-week low and high of GBX 515.60 and GBX 794.60, respectively.

Based on the factors discussed above, we have given a “Buy” recommendation on Sage Group PLC at the current market price of GBX 598.67 (as on 27 November 2020, before the market close at 8.05 AM GMT) with lower double-digit upside potential based 26.90 Price/NTM Earnings (approx.) on FY21E Earnings Per Share(approx.).

Softcat PLC – Heading into the second quarter with a positive momentum

Softcat PLC (LON: SCT) is a FTSE 250 listed Company, which provides technology services and solutions in the UK and Ireland. It has a customer base of 9,500 with over 200 vendors.

On 24 March 2021, SCT expects to release its H1 FY21 results.

Investment Rationale – Buy at GBX 1,116.00

• In FY20, ROE was 59.10%, and it remained above the industry median for the past three years.
• The Company witnessed good results from both corporate and public sector segments in Q1 FY21.
• The Company has no debt and has a consistent track record of strong cash generation.
• From a technical standpoint, 14-day RSI (37.60) depicts that the stock is in the oversold zone, and it is supporting the upside potential.
• As per the valuation metrics, Price/Earnings, EV/Sales, and Price/Cash Flow multiples of the Softcat PLC are currently lower as compared to the corresponding multiples of the technology industry.

Risk Assessment

• The Company is exposed to various kinds of risks such as loss of competitive advantage due to customer dissatisfaction, technology upgrades, and data security breach,
• The business interruption with COVID-19 outbreak and Brexit could also weigh upon the growth trajectory.

Q1 FY21 Trading Update (as on 20 November 2020)

• During Q1 FY21, the Company continued to perform well.
• It has delivered year-on-year growth in revenue, gross profit and operating profit while achieving its recruitment target.
• The cash generation remained in line with normal trends.
• The Board noted further positive momentum in Q2 FY21.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion 

The Company has continued the strong momentum and expects to report even stronger H1 FY21 results. During FY20, SCT delivered a strong financial and operational performance with year-on-year growth of 8.6% in revenues, 11.6% in gross profit, and 10.9% in operating profit. Meanwhile, the customer base also increased by 3% year-on-year. It also had a strong balance sheet with net cash of £80.1 million and debt-free position. Stock 52 week High and Low were GBX 1,454.32 and GBX 826.67, respectively.

Based on the factors discussed above, we recommend a “Buy” stance on Softcat PLC at the current price of GBX 1,116.00 (as on 27 November 2020, before the market close at 2.30 PM GMT), with lower double-digit upside potential based 34.22 Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

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

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

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.

Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.