17th May 2023 13:35
(Alliance News) - Brokers said there was "not much to fault" in Sage Group PLC's latest results, released on Wednesday, and with the stock jumping to the top of the FTSE 100 index, investors seemed to agree.
Shares in Sage rose 3.8% to 852.20 pence on Wednesday afternoon in London, while the overall FTSE 100 was down 0.1%. The stock is 28% higher over the past 12 months.
The Newcastle, England-based business software provider reported revenue in the six months ended March 31 totalled GBP1.09 billion, up 16% from GBP934 million a year prior. Sage said revenue was boosted by 29% growth in the Sage Business Cloud.
Pretax profit was GBP139 million, down 26% compared to GBP189 million a year ago. Sage noted a GBP71 million hit to profit, predominantly from adjustments relating to restructuring, and mergers and acquisitions.
"In our view, there is not much to fault in these results and while we are fanboys, even we are surprised by the lack of any weakening demand," said analysts at Peel Hunt.
"With both UK and [North America] now in double-digit growth, with the launch of cloud products in markets like France, it is now clear that the cloudification of Sage is accelerating. We believe this is likely to lead to upgrades on the cloud-native/connected expectations," the broker continued.
Looking ahead, Sage said it expects to post organic revenue growth of 11% in financial 2023, driven by the strength of Sage Business Cloud.
Martin O'Sullivan, an analyst at Shore Capital, said he expects to nudge up Shores earnings estimates for financial 2023 and 2024 to reflect the "better-than-expected" organic growth and margins reported by Sage in the first half.
O'Sullivan added that Shore continues to believe that Sage's organic revenue growth will accelerate "materially" over the next several years, as a shrinking base of declining SQL Server Reporting Services revenues has "less and less of a drag" on total organic revenue and Cloud migration continues, aided by an improving product portfolio and scaling Sage Intacct globally.
"More than before, Sage is building platforms and systems that empower customers to run smarter, more digital organizations, which could in turn drive powerful network effects. Why? Because Sage's solutions enable [small to medium-sized businesses] to be more productive and resilient by automating processes and providing better business insights," the Shore analysts said.
"Notably, most SMBs are confident in the long term and investing in digital tools to improve their competitiveness and comply with regulatory obligations (such as Making Tax Digital in the UK). Sage's new product innovations and enhancements together with the recent rebranding and digital marketing efforts appear to be yielding good results in terms of customer retention, upsell and new customer acquisition, which we expect to be quite durable.
"Finally, there is general growth in the number of SMBs in relevant regions. Altogether, Sage's organic revenue growth prospects remain promising, in our view, all the more so with UK recession risk now in the rear-view mirror," Shore's O'Sullivan explained.
As a result, O'Sullivan sees potential for a re-rating of Sage shares over the next 12 to 24 months on higher organic headline growth, although he added this is not factored into Shore's fair value at present.
"We observe encouraging signs, once again, in today's interim results announcement and reiterate our 'buy' stance," he concluded.
By Heather Rydings, Alliance News senior economics reporter
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