Sage risky in an unloved sector

Sage; Homestyle; Fusion Oil & Gas
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The Independent Online

Investors would be wise to avoid Sage. The group sells accountancy software to small and medium-sized businesses in Europe and the US, which is an increasingly unhappy sector to be in.

Investors would be wise to avoid Sage. The group sells accountancy software to small and medium-sized businesses in Europe and the US, which is an increasingly unhappy sector to be in.

Sage broke its monkish habit yesterday to issue a trading statement that set out the impact of the events of 11 September on its business, which gets some 45 per cent of its revenues from the US. Yes, some software licence sales were hit in the disruption to corporate decision making. But no, this is not a profit warning, because recurring revenues from maintenance contracts will be enough to ensure results for the year to the end of September will be "broadly in line with consensus market forecasts".

New licence sales account for about a third of Sage's revenue, and it is seriously under threat as the economic outlook for smaller companies gets murkier. Although the group relies on a relatively small amount of IT spending from a very large number of business customers, with whom it has robust relationships, growth in the new financial year is now even harder to predict.

At the same time, Microsoft is shaping up for a big launch into the accounting software market, having acquired Great Plains a year ago. Sage is trying to expand its software offering through a series of bolt-on acquisitions that are yet to prove their success.

Sage shares leapt 21.5p to 191p yesterday on relief that the events of 11 September will not disrupt the results due for publication in December. The stock has fallen from £9 since the tech bubble was pricked, but is still on almost 30 times 2001 earnings. The rating only falls to 25 times next year, and that is assuming Sage can get the 18 per cent earnings growth that its house broker, Deutsche Bank, is predicting. It's all a bit too racy.

Sage was the best performing share of the 1990s and plenty of investors are still sitting on profits. Even those who are not should cut their losses and sell.


The furniture retail group Homestyle has been suffering from what one analyst yesterday described as "acquisition diarrhoea". It has taken over the Harveys, Sleepmasters and Bed Shed chains in the last 18 months and begun a huge refurbishment programme.

Results for the six months to 1 September, released yesterday, were a little disappointing, which analysts put down to the disruption and higher interest payments on its swollen debts. Goodwill write-offs connected with the acquisitions all but wiped out first-half profits but, excluding goodwill, pre-tax profits were flat at £5.3m. Although Homestyle held the dividend at 4.4p, it did so by temporarily suspending its conservative practice of making sure its pay-out is at least twice covered by earnings.

Investors must get used to the business being skewed towards the post-Christmas period, now Harveys is in the portfolio. Homestyle's chief executive, Michael Rosenblatt, was unconcerned: "The fact is January sales are January sales, when ladies like to go out and buy furniture. Maybe they are fed up staying in cooking for the family, so come Boxing Day they are ready to shop."

Investors needn't be too alarmed, since the management are old pros. The performance of Harvey since their takeover has been breath-taking. Like-for-like sales are up more than 40 per cent on last year, thanks to the simple matter of improving the lighting and displaying the furniture in mock-up rooms. Margins are up due to the enlarged group's new purchasing power.

The shares were up 5p to 302.5p yesterday, putting them on a forward price-earnings ratio of barely 6 times. But the threat of a consumer spending slowdown while the group remains so highly geared means it should be avoided for now.

Fusion Oil & Gas

The end of betting duty is sure to make it tougher for little oil exploration firms to attract gamblers' cash. Fusion Oil and Gas was lucky to have raised £15m in its flotation a year ago.

Its strategy is to explore in parts of West Africa where no-one else is looking, bringing in partners to help cover the costs of drilling. It will then sell its stake and move on. It is a high-risk tactic but Fusion has already struck lucky, with a significant discovery of oil in a Mauritanian field in which it has a 6 per cent stake. Next year it moves on to its acreage in The Gambia and Senegal/Guinea Bissau, to see what that holds.

Yesterday, Fusion reported a pre-tax loss of £3.8m for the 63 weeks to 30 June.

The stock was floated at 50p, and jumped to 78p on the Mauritania find. It has since drifted lower to close yesterday at 32.5p, up 0.75p. Such stocks are driven as much by newsflow as valuation. It is possible to see your shares grow tenfold in two years or shrink to nothing.

Fusion's next chunk of good news is not likely until spring next year. Wait for the shares to hit 20p before having a flutter.