It is estimated that a third of Europe’s fastest growing tech firms are now based in the UK. One established UK-based tech firm is Sage Group (LSE:SGE). The software company based in the North East specialises in accounting and payroll software. In my opinion, the market crash has created an opportunity to pick up shares cheaper than usual.
In 2017, Sage was recognised as the world’s third largest supplier of enterprise resource planning software. This was only behind tech super giants Oracle and SAP. With over 13,000 employees and offices in 23 countries, Sage services over 6m customers. It is also the UK’s biggest listed tech company.
Covid-19 & the market crash
Sage saw over 30% of its share price value wiped off in the market crash. With a per share price of close to 800p before the crash, the market bottom in March saw prices closer to 550p per share. For me this represents a great opportunity.
A trading update at the beginning of April addressed the pandemic’s impact and the firm’s plans. Recurring revenue, which represents around 90% of its sales, was ahead of guidance, which is positive. Its processing and reporting services, which make up the other 10%, fell behind guidance and massively dropped off as March wore on, due to the pandemic.
Sage’s financial position is where I am confident that it is well equipped to deal with a market crash. It has a strong balance sheet with approximately £1.3bn of cash and available liquidity. This consists of around £900m of cash and more than £400m in undrawn facilities.
Sage has recently undertaken the strategy of transitioning its services to subscription and the cloud. The current pandemic has seen the adoption by businesses of cloud-based solutions and home working options. This strategy, both short and longer term, will be extremely beneficial. I feel.
Crunching the numbers
In November, Sage announced full-year results to 30 September 2019 showing another good year. There was over 5% growth in total revenue, and over 10% of growth alone in recurring revenue. It said a lot of its recurring revenue was due to customers taking up subscription and cloud migrations, as part of its strategy.
Growth of 16% in Northern Europe and 12% in North America is mightily impressive. Profit was down close to 9% compared to the previous year. This is not a concern for me, as Sage is currently increasing investment into its cloud strategy and growth into new territories. Sage did increase its dividend by 2.5% too, which is always good news for potential investors. It has increased its dividend year on year for the past five years.
With a high recurring revenue and expansion into new territories, the omens are good. A dividend yield of near 3% is very healthy in my opinion. In addition, at its current levels, shares trade near 22 times earnings. After the market crash bottom, its current share price is near 620p per share.
An enticing factor for me is that accounting software is not the type of software you change regularly. Once you start using one system or product, you are unlikely to change without good reason. With Sage’s high customer retention, its seems it is doing something right.
