Investing in Sage, ideas, opinions?

[TheMotorcycleBoy]

I really want to spend more time looking at their accounts.

Year                  2014       2015     2016     2017
Operating margin      27.5%      26.5%    27.3%    27.15%
Cash conversion       106%       110%     93.2%    86.3%
ROCE                  25.33%     25.23    25.0%    20.80%

I can appreciate the (temporary) drop in ROCE in 2017, seeing as presumably the 0.64B asset introduction of Intacct happened.

But why the falling Cash conversion (gross inflow from current operations / operating profit) from 2015? Surely the fall (2016 to 2017) can't be explained by the Intacct acquistion as the outflow for this will come after the current operations inflow. Hmm.....

(PinkDalek I'll certainly chew on this one from you when I have more time viewtopic.php?p=153501#p153501)

Matt

[TheMotorcycleBoy]

M&M,

We posted simultaneously. Everything I said about accts + ERP also holds true for CRM, so the net has to include saleforce.com when you are analysing cloud provision of company-wide solutions in the SME space.

Intuit turnover = $5.2bn; Sage turnover = £1.7bn; Salesforce turnover = $8.4bn

The UK market is begging for the Americans to come in and clean up. The reverse is not so.

regards,
dspp

Thanks for this dspp,

Bring me up to speed....so are Intuit and Salesforce competitors for that same space as Sage?

Slowly to seem slow/ill-informed, I'm sat down at the day job right now...

Matt

[dspp]

M&M,

There are other competitors to Sage around the world, but the Intuit Quickbooks in certainly one. Intuit & Sage go head to head in accts & ERP, and Intuit is larger and more successful and in the better marketplace over the last thirty years.
https://en.wikipedia.org/wiki/Intuit
https://en.wikipedia.org/wiki/Sage_Group

Salesforce are in the adjacent space of CRM, and to an extent you can use some of the Sage & QB functionality as a basic CRM, so one must pay attention, as for many SME a CRM is a basic need. But also SF are a good example of how to grow quick if SaaS is the way ahead, so that is another reason to pay attention.
https://en.wikipedia.org/wiki/Salesforce.com

To an extent the point I am making is that there are real companies behind the financial accounts, and that (in my opinion) one needs to have sufficient understanding of that underlying reality to consciously decide whether to dig any deeper. Or you are at risk of just being a slightly cleverer monkey sticking pins in the list. Of course we are never in perfect possession of all of the facts, even if we are on the inside, so the real decision is when to stop analysing and decide on buy/sell.

regards, dspp

[TheMotorcycleBoy]

thanks again

just read both of these

viewtopic.php?p=153491#p153491
viewtopic.php?p=153601#p153601

both very useful.

Matt

[simoan]

I think you need to be very careful and not get distracted by personal experience or your opinion about a company's product when evaluating any investment. I've become a much better investor over the years by ignoring my own in-built biases and evaluating each investment as dispassionately as possible. I think this is key. It takes a while to develop this approach as it is difficult psychologically to overcome (or even detect!) your own biases but everything I've read and experienced in 20 years show that the very best investors have this trait. As an example of this I currently hold shares in Shoe Zone even though I think the shops look tacky and terrible and the product even worse - it's all about the numbers and quality of management.

With regard to PZ Cussons, what is the appeal? I'm all ears but it doesn't seem to be growing revenue and the share price momentum looks terrible, so I can only assume resent results and updates have been poor. Also I believe it does business in some strange places like Nigeria that I'd personally put on my barge pole list. However, if you want to discuss it please start a new thread cos this one's about Sage.

All the best, Si

[cshfool]

I'm not that keen on the last 5 years of normalisation of SGE upwards in pretax profits from the IFRS3 values - I like to see these about the same so all these years of profit uppitising look a bit odd, in which every year is an exceptional year.

I get a rough value of 247p-350p for the EPV (using IFRS3 £342m-£443m norm 2017 profits - Oakley) and 8% interest rate, so some strong future growth seems baked in. I have a forward PE of 18 which is cheap by historic standards - for Sage - and currently showing a broker consensus of 6% growth forward, 2.7% yield, -ve tang. book value. I'd prefer about 20% forward growth to give a safer margin.

Borrowings have about doubled too in those 5 years, again net cash preferred, or reducing debt anyway. However note my basic approach is deep value and tend to avoid higher rated shares like this one so not enough safety margin for me here.

csh

[simoan]

I believe that working in tech, however does give me a big advantage, in knowing what acquisitions mean in tech. The firm I'm now in was once CSR:

https://en.wikipedia.org/wiki/CSR_%28company%29

and eventually we wound up, with an acquiring CEO. (I'm guessing he thought we could *actually* enter the mobile phone CPU arena). Zoran was one acquisition too far. And we bleed through this. (The logical thing, would probably have been to have concentrated better on the existing strong bluetooth, wifi and audio suite - CPUs on the sidelines of the digital gadget portfolio).

However, once it became clear that his strategy was doomed, he sold up (and pocketed big time); yes to a smart phone chip vendor - but I let you DYOR if you are interested in finding out which one.

Try not to fool yourself about this Matt. I work in technology too and the problem with technology is that it is highly competitive and many companies never make it into profit. To say you can spot the long-term winners, or that technology acquisitions tell you anything, is only to fool yourself. They don't really and I've been in technology all my working life and investing in shares for the past 20 years. In fact, I started investing just before the technology boom that busted at the start of the millennium. It was an exciting time and all my friends were buying technology shares, and making money hand over fist on any old unproven, unprofitable crock of a company - it was bonkers.

However, it's what got me interested in share investing. That was the time I first discovered that I had the right mentality to possibly make a go of it investing in shares. I could see the madness of the tech boom and bought Whitbread, Lloyds TSB and BHP Billiton instead. I didn't buy a single technology share. Of course, it goes without saying this approach suited my personality - If I see a crowd I walk away and you will never find me stood in a long queue to purchase anything.

As it happens my ex-colleague and good friend knows the founders of CSR because he worked at Cambridge Consultants with them. I also know someone that used to be on the board of CSR at one point and I have several friends that work for the part of CSR that was taken on by Samsung. So I know exactly what you're talking about. If you work for Samsung or Qualcomm in the UK then I guess you may work on the Cambridge Business Park so are not a million miles from me!

All the best, Si

[TheMotorcycleBoy]

As an example of this I currently hold shares in Shoe Zone even though I think the shops look tacky and terrible and the product even worse - it's all about the numbers and quality of management.

I hate Dominos Pizzas (to eat) and we hold DOM shares....
I hate smoking/vapeing and we hold IMB shares....
I'm appalled by covering our gorgeous countryside with box-like houses and overpaid CEOs and we hold PSN shares....

....I'll stop now... needless to say I'm dispassionate about investment choice. The money is the issue.

Try not to fool yourself about this Matt. I work in technology too and the problem with technology is that it is highly competitive and many companies never make it into profit. To say you can spot the long-term winners, or that technology acquisitions tell you anything, is only to fool yourself. They don't really and I've been in technology all my working life and investing in shares for the past 20 years. In fact, I started investing just before the technology boom that busted at the start of the millennium. It was an exciting time and all my friends were buying technology shares, and making money hand over fist on any old unproven, unprofitable crock of a company - it was bonkers.

I don't understand your point Si. I'm just in the process of evaluate whether to buy SGE.

As it happens my ex-colleague and good friend knows the founders of CSR because he worked at Cambridge Consultants with them. I also know someone that used to be on the board of CSR at one point and I have several friends that work for the part of CSR that was taken on by Samsung. So I know exactly what you're talking about. If you work for Samsung or Qualcomm in the UK then I guess you may work on the Cambridge Business Park so are not a million miles from me!

Yeah, I know all that lot. But I didn't rub shoulders with the founders. I've met/know folk of CCL, and at the Samsung sell-off, I was in the "more fortunate" bunch who stayed in CSR. So yeah, I'm in the Business Park with Qualcomm, Churchill House.

Matt

[TheMotorcycleBoy]

I get a rough value of 247p-350p for the EPV (using IFRS3 £342m-£443m norm 2017 profits - Oakley) and 8% interest rate, so some strong future growth seems baked in.

Can you go over what you've now calculated here?

Matt

[dspp]

I get a rough value of 247p-350p for the EPV (using IFRS3 £342m-£443m norm 2017 profits - Oakley) and 8% interest rate, so some strong future growth seems baked in.

Can you go over what you've now calculated here?

Matt

Just a guess, but:

Take approx (say) £400m/yr profits (or whatever is the avge of the last few stable years), and work out the NPV of that for (say) 10 years into the future using (say) an 8% discount rate. Then divide that NPV by the number of shares to give a implied value per share. If actual shareprice is above that then the market is presumably expecting more profits to become available in the future, i.e. growth.

I haven't done the numbers, I'm just suggesting what might be the methodology. Or maybe cshfool has a different methodology in which case I'll get corrected (!). Anyway have a go ........

regards, dspp

[TheMotorcycleBoy]

I get a rough value of 247p-350p for the EPV (using IFRS3 £342m-£443m norm 2017 profits - Oakley) and 8% interest rate, so some strong future growth seems baked in.

Can you go over what you've now calculated here?

Matt

Just a guess, but:

Take approx (say) £400m/yr profits (or whatever is the avge of the last few stable years), and work out the NPV of that for (say) 10 years into the future using (say) an 8% discount rate. Then divide that NPV by the number of shares to give a implied value per share. If actual shareprice is above that then the market is presumably expecting more profits to become available in the future, i.e. growth.

I haven't done the numbers, I'm just suggesting what might be the methodology. Or maybe cshfool has a different methodology in which case I'll get corrected (!). Anyway have a go ........

Thanks dspp,

Yes I've seen a couple of different valuation techniques. (e.g. multiple of PBT/number of shares, and also DCF based on the most recent FCFps value). I think whenever the techniques need you to guess rates and things they become questionable.

BTW me and Mel have done even more chatting and analysis on Sage! Yes, I know, you are probably thinking I am a tad obsessive. But one can't always escape one's nature so I'm happy with that. We are/were tempted towards SGE, mainly for the reason that you observe: that they have precious little established competition in the UK (i.e. Intuit and Salesforce, are not quite so UK biased ), but after now having put 2012-2017s records through, the underlying trend seems to be more or less consistent margins, but gradually shrinking ROCE, for which the reason can readily seen: increasing asset base. And also a fall in the ability to turn profit to cash (I couldn't readily explain that).

To an extent the point I am making is that there are real companies behind the financial accounts, and that (in my opinion) one needs to have sufficient understanding of that underlying reality to consciously decide whether to dig any deeper. Or you are at risk of just being a slightly cleverer monkey sticking pins in the list. Of course we are never in perfect possession of all of the facts, even if we are on the inside, so the real decision is when to stop analysing and decide on buy/sell.

I hear what you are saying. I think that I'm slightly more inclined to focus more on the numbers actually, since I'm usually cynical of how companies like to present themselves (advertisements/presentations etc). I'm not saying that we don't read past the numbers on an AR. We recently appraised (and subsequently bought) Bodycote (BOY) and we found their product applications interesting and diverse probably with long-lived markets.

But I think we'll leave Sage for now, or at least until the next AR comes out.

Finally: if anyone else is crazy enough to spend hot sunny evenings punching numbers into spreadsheets, a word of warning re. Sage: from 2014 they started cooking the P&L part of their ARs, in a way that they didn't in 2012-2013. They split it into 3 columns 1) "Underlying" 2) "Statutory" and 3) a column with the adjustment values for mapping between the first 2 columns. Unfortunately I originally picked figures from the underlying section, but then I got awfully confused when I started to look at the Cash flow statement. In the end I read the notes accompanying the Cash flow calcs. and figured out that the statutory figures were the ones being used, and thus my sheets results (which were obviously skewed in one direction previously) would be more consistent if taken from this section too.

Matt

[dspp]

M&M,

The crude Price:Earnings Ratio approach to valuations arises from just such a NPV/DCF approach to valuations. So as interest rates (i.e. discount rates) fall, then one would naturally expect PER to rise. That is why the long term cyclically adjusted version was conceived, aka CAPE Shiller:

https://en.wikipedia.org/wiki/Cyclicall ... ings_ratio

Such measures do not work well when a company is growing strongly, hence the need to add in Price Earnings Growth ratio (PEG), beloved of any dot com junkie or such like:

https://en.wikipedia.org/wiki/PEG_ratio

These are all very sensitive to tweaking the numbers, or as was once commented to me "small differences between two very large numbers" back when I was doing oilfield economics for dummies.

Anyway discussions of metrics becomes a discussion of mechanical investing, so here are a few links:
viewtopic.php?f=8&t=11950
viewtopic.php?f=31&t=7444&p=81823&hilit=screener#p81823
(there were some others, I'll stick them in if I get time in the next day or so)
ed: add: found it : viewtopic.php?f=8&t=11019&p=130589&hilit=extradash#p130589

I have no particular view on Sage, as I am not invested in it. However I am sufficiently curious that your investigations interest me, so thank you for it.

regards, dspp

[TheMotorcycleBoy]

Thanks for this dspp, I'll try to process those links when I get more time.

I'm busy re-looking at TATE.

If everyone is sufficiently interested, and they tell the name of the subforum area , I'll post any thoughts I've had there.

Matt

[dspp]

mel, here is good for tate, on a new thread please, regards, dspp

[TheMotorcycleBoy]

Had a quick look at SGE share price and news just now.

I did not buy any of them, and I'm not unhappy about that decision...

Struggling software giant Sage slid to the bottom of the FTSE 100 on fears that its sales strategy reboot could be hampered by intensifying competition. The software provider insisted that it had already started to address its problems and dismissed 30 executives in its top ranks to stop the rot.

But Deutsche Bank warned clients that higher-end rivals are eating into Sage’s market share and the “competitive situation” in its mid-market business appears to be “worsening”.

source:
https://www.telegraph.co.uk/business/20 ... ion-fears/

So going to "the cloud" makes it harder, not easier for them.

[CommissarJones]

John Kingham at UK Value Investor looks at Sage in his latest piece.

https://www.ukvalueinvestor.com/2018/08 ... tock.html/

[Watis]

CEO departs and further price falls today, some comment here.

Watis

[TheMotorcycleBoy]

Have to say, I agree with TopIdiotboy. Like many software companies Sage is undergoing a transition from licensed sales with maintenance to the SaaS model and that has hit revenue and margins in the short-term. However, in the long-term the SaaS model will provide a higher quality and stickier recurring revenue stream.

Sage is a top quality company with 5yr average ROCE and Operating margins around 20% to illustrate this. Net debt has gone up due to some large acquisitions in the past few years but is still less than 3x Net Profit which is my line in the sand. I expect debt to reduce quickly in the next couple of years (barring any further acquisitions) given the excellent free cashflow metrics. I held until the profit warning in the Spring. I am waiting for the trading update which should be out sometime in the next week to see if the situation has changed and will likely re-open a position if things have not worsened with regard to margins.

All the best, Si

Hi Si,

A year on, and I'm having another look at Sage. Wondered - did you re-open the position you mentioned?

I see they are down 16% from their peak in early July. It seems the main reason for the fall was that the legacy product, despite them seeing growth in the SaaS/cloud business:

https://www.proactiveinvestors.co.uk/co ... 24491.html

Also from https://www.investegate.co.uk/sage-grou ... 00066369G/

Regionally, in the first nine months of the year, North America delivered revenue growth of 10.0% to £471m, with 12.3% recurring revenue driven by cloud connected solutions and Sage Intacct. The UKI continued its strong recovery with revenue growth of 7.2% to £300m and 15.6% recurring revenue growth driven by continuing success in Sage 50 cloud connected migrations. France delivered revenue growth of 2.0% to £206m and recurring revenue growth of 5.4%, driven by cloud connected solutions. Recurring revenue performance in other regions was largely in line with performance at H119.

In the portfolio view of revenue, recurring revenue growth of 10.6% reflects growth in the Future Sage Business Cloud Opportunity of 12.7% to £1,011m and flat performance of £172m in the Other portfolio.


Wondered what your opinions are, a year later.

Matt

[simoan]

Hi Si,

A year on, and I'm having another look at Sage. Wondered - did you re-open the position you mentioned?

I see they are down 16% from their peak in early July. It seems the main reason for the fall was that the legacy product, despite them seeing growth in the SaaS/cloud business:

https://www.proactiveinvestors.co.uk/co ... 24491.html

Also from https://www.investegate.co.uk/sage-grou ... 00066369G/

Regionally, in the first nine months of the year, North America delivered revenue growth of 10.0% to £471m, with 12.3% recurring revenue driven by cloud connected solutions and Sage Intacct. The UKI continued its strong recovery with revenue growth of 7.2% to £300m and 15.6% recurring revenue growth driven by continuing success in Sage 50 cloud connected migrations. France delivered revenue growth of 2.0% to £206m and recurring revenue growth of 5.4%, driven by cloud connected solutions. Recurring revenue performance in other regions was largely in line with performance at H119.

In the portfolio view of revenue, recurring revenue growth of 10.6% reflects growth in the Future Sage Business Cloud Opportunity of 12.7% to £1,011m and flat performance of £172m in the Other portfolio.


Wondered what your opinions are, a year later.

Matt

Nope. I didn't buy back into Sage. It keeps coming up on my quality filter but I haven't seriously thought about it since we last discussed it. I have a reasonable exposure via Fundsmith and it's not something I want to be overweight in. Not that there's anything wrong with it necessarily, just that I've been mostly adding to existing smaller cap holdings and not really opening too many new positions.

All the best, Si

[TheMotorcycleBoy]

Hi Si,

A year on, and I'm having another look at Sage. Wondered - did you re-open the position you mentioned?

I see they are down 16% from their peak in early July. It seems the main reason for the fall was that the legacy product, despite them seeing growth in the SaaS/cloud business:

https://www.proactiveinvestors.co.uk/co ... 24491.html

Also from https://www.investegate.co.uk/sage-grou ... 00066369G/

Regionally, in the first nine months of the year, North America delivered revenue growth of 10.0% to £471m, with 12.3% recurring revenue driven by cloud connected solutions and Sage Intacct. The UKI continued its strong recovery with revenue growth of 7.2% to £300m and 15.6% recurring revenue growth driven by continuing success in Sage 50 cloud connected migrations. France delivered revenue growth of 2.0% to £206m and recurring revenue growth of 5.4%, driven by cloud connected solutions. Recurring revenue performance in other regions was largely in line with performance at H119.

In the portfolio view of revenue, recurring revenue growth of 10.6% reflects growth in the Future Sage Business Cloud Opportunity of 12.7% to £1,011m and flat performance of £172m in the Other portfolio.


Wondered what your opinions are, a year later.

Matt

Nope. I didn't buy back into Sage. It keeps coming up on my quality filter but I haven't seriously thought about it since we last discussed it. I have a reasonable exposure via Fundsmith and it's not something I want to be overweight in. Not that there's anything wrong with it necessarily, just that I've been mostly adding to existing smaller cap holdings and not really opening too many new positions.

All the best, Si

Cheers Si,

I'm umming and ahhing currently. I've tried to re analyse them and based future cash flows and earnings power value, I think they are worth between 580-640. That is, if the transformation to SaaS is successful. I only seen one brokers note since their last TU, which sets a target of 625p.

http://www.stockmarketwire.com/article/ ... e-PLC.html

I think most brokers are downbeat on it too:

https://www.marketscreener.com/THE-SAGE ... consensus/

On the last reported earnings they would be PE=23 and DY=2.6% at 630p. They do have an average dividend growth rate of about 8%. Since I've no exposure to the software sector or accounting or SaaS, perhaps I should see I can buy them at about this kind of price.

Matt