The Investment Column: Wise advice is to keep on buying success story Sage

The future looks encouraging for Bellway as social housing grows; Accuma looks good for those with a debt wish
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The Independent Online

Wise readers who took our advice to buy Sage, the FTSE 100 software group, a year ago when the shares were 172p are looking clever. The investment has grown a healthy 27 per cent and there is more to come.

Sage provides accounting software for small- and medium-sized companies which helps them run their businesses efficiently. Sage's software provides the essential office functions that once would have been carried out by armies of clerks.

It is this type of cost-saving and time-saving software that helps entrepreneurs start companies, grow companies and ultimately create wealth and expand the UK economy. Sage's success is sometimes overlooked, although it is the only software business in the FTSE 100, which is partly why its shares trade at a discount to much bigger software rivals such as Microsoft. The discount also reflects fears that its bigger rivals, including the likes of SAP, will one day turn on it and launch a price war to steal its business. Despite all the fears, there has been little sign of that yet. Indeed, in the current mergers and acquisitions boom, a larger rival is more likely to turn round and buy Sage than launch an expensive and time-consuming price war against it.

In the meantime, Sage continues to justify investors' support. Yesterday, it issued a trading statement for the year to 30 September, revealing revenues up 14 per cent to £777m and pre-tax profits up 13 per cent to about £204m.

Operating profit margins have come under a little pressure, partly due to an increase in research and development spend plus some dilution from acquisitions. The key figure, though, is the organic revenue growth, which analysts extrapolate is running at 8 per cent. The City is therefore confident that Sage's medium-term outlook is good. The company has a strong balance sheet which most expect it will use to continue making small, but earnings-enhancing, acquisitions.

However, there is another possibility. It seems likely Sage will have a positive net cash balance by the end of December. In the absence of a really big acquisition, the logical thing for a large, ungeared FTSE 100 company is to borrow against the strength of its balance sheet and buy back its shares. That should improve the company's stock market rating while returning cash to investors. CSFB already reckons Sage has bank facilities available of £500m which, given back to shareholders, would boost present year earnings per share by 5 per cent.

Having made a good return in the past year, readers should keep buying.

The future looks encouraging for Bellway as social housing grows

The things a builder has to do to sell a house these days. Cash discounts, part exchange, throwing in the fixtures and fittings and even, according to Bellway yesterday, new carpets and curtains, too.

All these incentives, most often aimed at tempting the first-time buyer, will depress the profit margin housebuilders can make in the coming year, but the feared collapse in house prices appears to have been averted. With a mini resurgence in buying activity since the summer, now sellers are asking more reasonable prices, the market appears to have achieved just the "soft landing" hoped for.

So while Bellway was warning investors not to expect a repeat of the level of growth it reported in yesterday's annual results, the future looks safe as houses for the industry, and for Bellway in particular.

Bellway is a gem of the housebuilding sector. The average price of a Bellway home is just £164,000 and half are sold for less than £150,000. Its operations are split almost 50-50 between the North and the South. It is doing increasing amounts of work in social housing, where margins are similar because the absence of marketing costs makes up for the lower prices paid by housing associations.

And it has some of the most conservative accounting policies in the industry, which means there should be less of a dent to profits margins.

In the year to 31 July, Bellway made profits of £218.2m, up 6 per cent, but it decided to boost the dividend by 25 per cent to show its confidence that its plans to boost output further underpin its success, no matter what happens to prices.

There is a housing shortage in the UK. This is the incontrovertible fact that should help investors in the building sector sleep even as the headlines vacillate between boom and predicted bust. It also means that the sector is grossly undervalued, Bellway in particular at 865p, barely six times annual earnings. Buy.

Accuma looks good for those with a debt wish

The UK consumer is creaking under the weight of unprecedented debt. So much, so well known. Investors looking for a way to profit from this phenomenon are often guided to short-sell consumer stocks such as retailers or lenders who face increasing levels of arrears and bad debts. There is a positive investment recommendation to be made, too: buy the new debt-advice companies which specialise in "individual voluntary arrangements", IVAs, an increasingly popular half-way house for debtors which means they can avoid bankruptcy.

The Manchester-based Accuma floated in March, having raised £4.1m to fund television marketing for its IVAs. It seeks people who can no longer service debts of more than £15,000, works out what they can afford to pay, persuades creditors to write off most of the rest, and takes a £7,000 fee for administering the arrangement over five years.

Clearly that fee is large and it seems inevitable that creditors will one day find a way to bring it down to size. For now though, IVA arrangers compete only for indebted consumers, and the creditors are presented only with a take-it-or-leave-it-deal, so there is no price competition. Watch out for any legislative changes, due next year, that might change that, though.

In the meantime, the growing acceptance of IVAs, and Accuma's own strength through market share growth and acquisitions to come, make this a share worth buying.

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