Sage
‘Perfectly solid, just not very interesting,” is one analyst’s take on Sage’s halfway figures. Much the same could be said of the UK’s biggest software company, and that is probably how the market and Sage want it. The company increasingly looks like two different businesses bolted together, providing mutual support.
On the one hand is the legacy business, supplying entrepreneurs and small businesses with software. This is sluggish, because the products are quite old and not flying off the shelves. It is, though, unlikely to go away, because no one wants to go to the trouble, and take the inevitable risk, of changing a perfectly reliable IT system. Recurring revenues were up by 10 per cent in the half year to the end of March, or more than two thirds of the total.
The trick here is to shift as much of the business on to a subscription model, which offers a more reliable income. Sage saw a 50 per cent rise in subscription contracts to 842,000 in the half year.
The other side of the business is more whizzy, and unproved. This is developing new products, such as its Sage 50 Cloud software, which enables entrepreneurs to access data on the move. This new product is achieving strong growth, almost doubling subscriptions in North America, but from a low base.
Sage announced a small acquisition yesterday that gives it access to new technology, and it is developing more products with companies such as Salesforce, Google and Apple. Stephen Kelly, chief executive, is cutting annual costs by £50 million, for example by getting out of unwanted properties.
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Revenues were up by 6.2 per cent in the first half and operating profits by 1.9 per cent to £189 million. The company is aiming for revenue growth of 6 per cent this year and margins of 27 per cent — targets that will probably be exceeded.
From an investment perspective, the problem is that the multiple the shares sell on, after their strong progress since the autumn, is more suitable to that whizzy new business than those legacy activities.
Off 22p at 582p, they still sell on 22 times earnings and the dividend yield is little more than 2 per cent. The story is a good one, but the shares look fully valued.
MY ADVICE Avoid for now
WHY The progress has been strong and the company is well balanced between reliable legacy income and growth, but all this seems to be accounted for in the price
Centrica
Cost of two acquisitions £350m
The key to Centrica’s surprise decision to raise about £750 million by a placing to institutional investors lies in the eighth paragraph of the formal statement. Switching from exploration and production to what the company calls its “customer-facing businesses” is taking longer than expected.
What this means is that Centrica has identified two such businesses to acquire, one announced yesterday and one imminent, both in the area of serving small businesses, at a total cost of £350 million. The sale of E&P assets, though, is taking longer than expected, in particular a Canadian venture that would account for the biggest slice of the £500 million to £1 billion the company expects to raise from disposals.
Rather than get rid of this at a fire-sale price, Centrica wants to wait until next year, when hopefully the oil price will have recovered and a better return can be got. This leaves a gap when debt would be uncomfortably high, with a probable effect on its credit ratings. As a consequence, it is better to raise cash now to cut debt and pay for those acquisitions.
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Because it is a placing to institutional investors, Centrica’s 620,000 private shareholders will not get a look-in. This is probably inevitable; raising the equivalent of just 7 per cent of the market capitalisation by means of a rights issue, would have been too expensive. The shares, off 23¼p at 208p now offer a forward dividend yield of approaching 6 per cent. Worth buying for that, and a long term recovery.
MY ADVICE Buy long term
WHY Yield is becoming highly attractive
Wood Group
Revenue $5.5bn
Pre-tax profit $257m
Like many in the oil business, Wood Group has been hurting, but it may be some time before the bleeding stops. Bob Keiller left as chief executive at the end of last year after overseeing about 8,000 job losses. Robin Watson has had to continue where his predecessor left off, with a further 300 cuts this week.
Wood’s unsentimental approach and global reach means it remains on course to hit annual forecasts for this year. While the shares are some way off the near-900p high of August 2013, they have rallied a little since a low of 534½p in November last year.
Mr Watson wants to expand the engineering, maintenance and construction services Wood provides to the industrial sector as one way to mitigate the oil and gas downturn. A steady stream of new contracts and extensions suggest its expertise is still in demand. It is also still able to do deals, with last month’s acquisition of US software and consulting firm Ingenious an interesting bolt-on which adds capabilities in remote asset monitoring and training provision.
A sustained recovery in the oil price would help, but Mr Watson appears likely to face further tough decisions about the size of the workforce.
MY ADVICE Hold
WHY Not the time to buy
And finally ...
The football season is drawing to a close and so too is the review of Goals Soccer Centres, the outdoor small-sided games operator, under Nick Basing, appointed chairman in March. A new game plan can’t come soon enough for investors in Goals, whose shares have suffered a drubbing in the past year, halving to 95½p. The AIM-quoted company said yesterday that sales remained negative for the first 18 weeks of the year but hoped to announce a new chief executive imminently and the review’s findings shortly.
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