The Investment Column: Sage is a wise buy in the volatile tech sector

Acambis; FireOne
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The Independent Online

Our view: Buy

Share price: 252.5p (-12.75p)

Sage is the great UK technology survivor. It's the only UK tech stock to have kept its place in the FTSE 100 since the tech downturn, while more glamorous sector rivals now fight among the mid-caps. Yet after its aborted bid to buy its Norwegian rival Visma and slowing organic growth in the first half, some investors may be getting edgy.

Shares in the Newcastle-based software developer have risen 30 per cent over the past year. It is considered a safe haven in the volatile tech sector because of its steady earnings growth and impressive cash generation. Sage's first-half results highlighted 18 per cent revenue growth to £459.9m and a 19 per cent pre-tax profit increase to £113.7m. The interim dividend was raised 17 per cent and Sage ended the period with 5 million customers.

But organic revenue growth of 5 per cent disappointed and most observers had expected new licence sales to grow more than 2 per cent. A 9 per cent drop in mid-market sales in the US was not welcomed either.

Sage has dismissed concerns that the disappointing organic growth is a result of it losing market share to the US behemoth Microsoft. Sage competes predominantly with the US developer Intuit, but the shadow of Microsoft has loomed large over the company's prospects for many years. Despite Microsoft's desire to tackle the small- to medium-sized business market, Sage has yet to feel the giant's breath on its neck. It actually attributed the US decline to under-performing product lines, not Microsoft. The company expects strong second-half momentum, driven by new products, to offset the first-half disappointment.

Sage is also very acquisitive and is eyeing up companies around the world, specifically in Asia where it is keen to leverage its presence in Singapore. Despite missing out in Norway, management remains confident there is plenty of opportunity to add to its stable in existing and new territories. Its £400m war chest gives it considerable firepower.

Sage is a proven performer and has continued to grow steadily despite the threat from much larger players and the downturn in tech spending. Therefore, investors can feel confident momentum will be regained in the second half. Buy.


Our view: Hold

Share price: 183p (+1p)

The Cambridge vaccine maker Acambis is going through turbulent times. It went to court in Washington DC on Monday to fight a patent-infringement lawsuit that could endanger a lucrative contract to provide smallpox vaccines to the US government.

On top of that, Acambis's chairman, Alan Smith, announced yesterday he will step down this year after seven years in the job. The veteran biotech executive Peter Fellner, who joined as a non-executive director this year, is tipped to succeed him.

The company also admitted it had tried and failed to make a major acquisition at the start of the year. It ran up a big bill related to the deal, which fell through when the target company was withdrawn from the sale, adding to higher spending on research and development which pushed up the group's losses to £11.4m in the first three months of the year, from £5.8m a year ago.

The biggest risk to Acambis stems from the charges brought by its Danish rival, Bavarian Nordic, before the International Trade Commission in Washington. Bavarian alleges Acambis's MVA vaccine infringes its treatment which is based on the same smallpox strain. It has also filed suits in Delaware and Austria, where Acambis's partner, Baxter Healthcare, manufactures its vaccines. The judge in the ITC case is expected to give an initial opinion in August. It is possible the companies will come to a royalty agreement.

Despite the legal dispute, Acambis is expected to win part of an MVA contract from the US government - sharing with Bavarian - which is due to be awarded by the end of June, delayed from February. Hold.


Our view: Buy

Share price: 338.5p (+9.5p)

FireOne is one of the numerous companies to have its fortunes pinned to the success of the global online gambling boom and, like its clients, its shareholders have had plenty of highs and lows since it floated in London in June.

Like NetTeller and PayPal, Fireone offers customers an "e-wallet" service, allowing internet gamblers to deposit money at casinos or poker rooms, securely and (crucially in the US) legally.

US law forbids gamers directly depositing money on gambling sites. However, services such as FireOne help navigate around this, opening up the market to millions more people and making it an indisposable part of an industry growing exponentially.

Although customer numbers and transfer volumes have soared since the float, fears about crackdowns in US law constantly hold back the share price. When we first tipped this stock in August, the shares had already doubled since floating at 241p. By yesterday, they traded at only 338.5p.

The concerns about the law are expected to pass, and given that it is established as the second-largest player in the market, FireOne's prospects continue to look exciting. Yesterday's results were once again impressive, sending its shares back on an upward trajectory. It may be a bumpy ride, but we reiterate our "buy" recommendation.