Investment Column: Taking a hint on Sage would be a wise move
St James's Place Capital; Renishaw
Thursday 29 July 2010
Our view: Buy
Share price: 243.5p (-5p)
Technology giants in the US have a certain cachet or mystique to their brands and operations. Their services are household names used on a daily basis by millions of consumers, many of whom identify closely with their products, whether they are provided by Apple, Google or Microsoft.
The UK's dominant tech players tend to have found more success in the business-to-business space and are little known to the consumer market. The lack of such a profile for the FTSE 100 stalwart Autonomy prompted it to sponsor Tottenham Hotspur's shirts.
Sage is in a similar mould. It helps businesses to manage their finances, people, customers and suppliers, and has been around for the best part of two decades. It is a big company that few people in the street will have heard of, with 6.2 million customers and 13,100 employees around the world. This is no reason to ignore the stock.
Paul Walker, the outgoing chief executive, yesterday updated the market, saying there was little in the way of surprises. Trading since the May interims has been in line with expectations and the trends, particularly in the third quarter, appear positive.
It's also worth noting Sage's growth in recurring subscriptions against one-off contracts. The former now account for about 65 per cent of total revenues and will be there even should the recovery crumble. Cash generation is strong, and net debt fell from £305m at the end of March to £280m three months later. This provides headroom for more M&A activity in the coming year. The management remains cautious over the uncertain economic conditions, but says that the company will meet full-year expectations.
There is an opportunity for profiting from Sage: as the market recovers as the group has lagged its peers since the last quarter of 2009. Jefferies puts its price at just 12.9 times forecast full-year earnings, a 40 per cent discount to rivals. Take the hint. Buy.
St James's Place Capital
Our view: Buy
Share price: 273.3 (+16.9p)
Given yesterday's results, perhaps it's no wonder that the Lloyds Banking Group performed a U-turn on its pledge to sell its near 60 per cent shareholding in St James's Place Capital. The specialist life insurer and fund manager's sales came in well ahead of the City's forecasts. Total new business was up 44 per cent in the first half, 46 per cent in the second quarter and there was a net inflow of £1.5bn of funds, bringing assets under management up to £22.4bn. The number of "partners" who sell for SJPC also improved by 3 per cent to 1,506.
The sales are reading across to earnings, too: pre-tax profits were up 82 per cent to £36.3m. SJPC is something of an oddity – its clientele are more upmarket than other life insurers, and salesmen are paid by commission on what they sell. Despite this, the company has steered clear of trouble with the Financial Services Authority.
Sales are only worth making if they are both profitable and compliant with the regulatory rulebook. SJPC appears to have managed to square that particular circle and, with Lloyds' backing, the issue of a stock overhang has evaporated. There's always a worry that Lloyds will seek to do something stupid – like interfering with what SJPC does. Big companies, and big banks, are sometimes like that. But, there doesn't appear to be any sign of that at the moment. At a 17 per cent discount to Panmure's estimate of the shares' 2010 embedded value, we say keep buying.
Our view: Hold
Share price: 823.5p (+13p)
The last time we looked at Renishaw things seemed to be looking up for the engineering group and it had just reversed the voluntary pay cuts introduced at the start of 2009.
Yesterday there were further signs that the turnaround is gathering strength when Renishaw issued full-year figures, posting a threefold rise in adjusted pre-tax profits. The news on the order book and the company's outlook statement were just as pleasing, suggesting continued strength in the months to come.
Ordinarily, such a performance and prospects would call for a buy, but the market has woken up to the group's potential. The stock is up around 50 per cent since the beginning of this year (when we said buy), and around 25 per cent since the beginning of June. It trades on a multiple of around 21 times forecast 2011 earnings. So, we fear that some investors may seek to book profits in the short term.
Nonetheless, we are still backers of the company. We would confidently recommend buying Renishaw on any signs of weakness. Otherwise hold for the long-term potential.
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