The Investment Column: Sage is finally flavour of the month

Brewin Dolphin; Just Retirement
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The Independent Online

Our view: Buy

Share price: 259p (+18p)

Software company Sage Group has been a quiet achiever over the past few years. It remains the only tech stock to maintain its FTSE-100 status following the collapse of the technology bubble, yet it has gained a utility-like stature due its steady, not spectacular, growth. However, a 21 per cent increase in revenue and a 24 per cent rise in earnings over the past year looks to have shifted the perception that Sage is a defensive stock. Investors seem to have got the message after shares surged over 7 per cent to 259p on the back of the results yesterday, and a confident outlook.

What really caught the eye was better-than-expected organic growth. Some analysts had previously suggested that Sage is overly reliant on acquisitions and could find it tough to identify appropriate targets after completing nearly 30 significant deals since 1991. Sage has brushed aside such concerns after buying nearly a dozen companies in the past year and bolstering organic growth by improving its sales channel and broadening its product set.

Sage's latest results should also help shift the perception that it is a one-trick pony that is good at selling accounting software to small and mid-sized companies. It has spread its wings over the past two years to increase its presence in market sectors like construction and manufacturing. More recently, it has looked to move out of the back office by acquiring US healthcare software company Emdeon, and credit card transactions processing business Verus. Further acquisitions in the US should help offset the impact of a weak dollar, as the company borrows in the local currency to fund the deals.

Despite its progress, Sage still trades at a significant discount to its peers. Based on 2007 forecasts, the stock trades at around 17.3 times, lagging the likes of SAP and Intuit, its closest rival, that trade at 23 times market expectations. After five successive years of double-digit earnings growth, Sage looks to finally be flavour of the month. Buy.

Brewin Dolphin

Our view: Hold

Share price: 175.25p (-4.75p)

When markets do well, so do stockbrokers and fund managers. So it was no surprise to see an upbeat set of results from Brewin Dolphin yesterday. Pre tax profits for the year to 30 September came in strongly ahead at £32m from £17.8m (£24.6m before one-offs).

The question that has to be asked about all companies like this is how much extra value the management is adding over and above the benefit the company has gained from rising markets. There is enough here to suggest that there is more to these results than simply riding the market higher. Brewin has benefited from adding new teams of staff, while at the same time switching clients from advisory fund management to discretionary - which, according to the company, provides clients with a better service. More to the point, it pays more. Brewin's corporate broking business, while quieter in the second half the first, is also doing well.

Even after slipping 4.75p to 175.25p yesterday, the shares trade on a multiple of around 14.5 times next year's earnings, with an estimated yield of 3.2 per cent. The rating makes the shares a little cheaper than rival Rathbones and a lot cheaper than Rensburg Sheppards. The stock has performed strongly in recent months, before slipping back.

Despite the efforts of management, Brewins' profits remain intrinsically linked to the performance of the market. But the outlook for that is relatively benign so it's at least worth holding these shares.

Just Retirement

Our view: Buy

Share price: 185p

Britain's next generation of retirees are in for a nasty shock. Having saved far less than their parents and grandparents before them, they are odds on to live much longer. It doesn't take a maths degree to see that the sums don't add up.

Enter Just Retirement - a relatively new financial services company, which listed on the Alternative Investment Market yesterday, and which aims to help people make the most of the assets that they have once they finally stop working.

The company has two main threads. With its equity release plans, it allows elderly people to get their hands on the capital in their homes without having to sell up - an increasingly popular way of topping up retirement incomes.

Its impaired life annuity business provides smokers, and those with serious medical conditions, a higher level of income on their pension when they retire.

Both are booming businesses, and in the two years since the company's launch, it has been growing exponentially. Having raised £50m during yesterday's IPO, it is adequately capitalised, and has an experienced management team headed by Mike Fuller, the former chief executive of a similar business, Britannic Retirement Solutions.

New distribution agreements with Saga and The Exchange look set to drive short-term growth, while increases in longevity and a damaged savings culture provide the backdrop for the company's long-term success. Unconditional trading begins on Monday, buy some.

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