Today I’d like to discuss the outlook for PayPoint (LSE: PAY), the payment processing firm and The Sage Group (LSE: SGE), the FTSE 100 accounting and enterprise software group.
I regard both of them as shares with robust growth prospects that may deserve a place in a diversified portfolio.
Organic growth and dividends
Many of our readers would have either noticed the yellow logo or possibly used the services of PayPoint at their local convenience stores or supermarkets.
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On 24 January, the company released a trading update and reported a “solid quarter“. Net revenue from UK retail services increased by 4% with its core business.
And there was lots more good news: Its core business, over-the-counter utility bill payments, is a steady earner. Its aggressive rollout of the updated PayPoint One terminals has gone better than expected. On average shops pay a weekly service fee £14.89 to use PayPoint One. Its flagship EPoS Pro terminal, launched over a year ago, is now in 520 convenience retailers and management is hopeful about growing numbers.
The group which boasts a 43% share of the UK convenience sector is working to up its game with mobile payments, offering customers plenty of choice, from app to in-store. And its parcel delivery and collection service, Collect+, is profitable as more customers turn to convenience stores to receive and/or return purchased items.
The UK click-and-collect market handles about 120m parcels a year, a number that online retail association IMRG expects to double within the decade, so Collect+ is likely to contribute to the bottom line with growing momentum.
For income investors, the group’s dividend yield is almost 5.5% and PayPoint also has a policy of paying out special dividends.
And the firm isn’t only exposed to the UK market. It has similar operations in Romania. After Brexit, this small but profitable base could serve as an important gateway into the EU and further contribute to the bottom line.
Subscription-based monetisation
Investors are increasingly paying attention to software-as-a-service (SaaS) companies with high recurring revenues and strong client retention.
In January, the UK’s largest listed software business group, Sage, released its trading update for the three months to 31 December. CEO Steve Hare noted the “strong start to FY19” and focused on the “high-quality subscription and recurring revenue” as the group worked on “becoming a great SaaS business.”
Organic revenue growth was 7.6% and increased to £465m. The solid results were driven by 28% growth in subscription revenues. North American operations were also up 10.4% and turned over £154m in sales.
Most of Sage’s customers are small and medium-sized enterprises that tend to stay as customers for years. Therefore the group’s revenues are quite predictable, a big attraction for investors who look for reliable companies.
Meanwhile Making Tax Digital (MTD), the UK government’s flagship scheme to move the tax system online, will begin to affect most businesses from April. MTD-compatible software enterprises, such as Sage, will help many customers become MTD-ready. And this process could see many of them inclined to stay on as long-term customers.
The company’s shares now trade around 660p, about 25% below a high of 820p seen in January 2018. This lower price may offer long-term investors a good entry point into the shares as I believe they’d be rewarded handsomely within three to four years.
