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It’s straightforward to complain concerning the dearth of huge tech shares listed in London in comparison with New York. However there are some corporations on this facet of the pond which have confirmed they’ve what it takes to make it within the generally extremely aggressive tech world.
One jumped 19% in early buying and selling right now (20 November) after the market digested its newest annual outcomes, which confirmed a 55% progress in primary earnings per share.
Easy however confirmed enterprise mannequin
The share in query is accounting software program specialist Sage (LSE: SGE).
Sage’s enterprise mannequin is pretty easy however has been worthwhile over the course of many years. It helps small- and medium-sized companies handle their accounting merchandise, due to a collection of software program services.
I like that as a market and in addition as a mannequin. The demand is excessive and prone to stay that manner. The service is ‘sticky‘, that means that when corporations have gotten used to utilizing Sage and their workers really feel snug with it, there’s inconvenience and a time price in switching to rivals.
That helps give Sage pricing energy, as was obvious in final yr’s efficiency. Income grew 7% to £2.3bn. Revenue after tax leapt 53% to £323m. Meaning the corporate’s internet revenue margin got here in at 13.9%.
Lengthy-term dividend progress
That revenue after tax greater than covers the annual dividend, even after a proposed enhance of 6%. Certainly, the corporate feels so flush it additionally introduced plans for a share buyback of as much as £400m. Given the present share value (up 75% from early final yr), I personally don’t see that as an incredible use of spare money.
Sage has a progressive dividend coverage, that means it goals to develop its payout per share yearly. It has already achieved so for a few years and, as its enterprise mannequin continues to be extremely money generative, I count on that if issues go easily it can hold doing so.
Nonetheless, whereas I like the expansion prospects, I’m much less excited concerning the yield. That presently stands at 1.5%. If the dividend per share stored rising on the 6% achieved final yr, it will take round 14 years for the yield merely to return in step with the present FTSE 100 common (presuming a flat share value).
Robust enterprise, excessive valuation
Nor do I feel the shares provide me compelling worth in the intervening time. Because the sharp motion in earnings final yr demonstrates, this isn’t a enterprise that’s immune from important volatility. Dangers I see on the horizon embody the flipside of one of many enterprise’s alternatives, particularly scaling up.
Doing that efficiently may assist develop revenues forward of prices, boosting revenue margins. However a misstep, for instance misunderstanding the variations between particular markets, may very well be expensive.
On steadiness although, I proceed to see this as a superb firm with robust prospects. Nevertheless it has a chunky tech share value valuation hooked up. The £13bn market capitalisation could look low-cost by some US requirements — however it’s too expensive for my tastes.
