Investment Column: Stuttering Sage is saved by the dividend

Staffline Group; Numis Corporation

Alistair Dawber
Thursday 03 December 2009 01:00 GMT

Our view: Hold

Share price: 221.7p (+7p)

It is often journalistic suicide to say so, but the next 300 or so words are not very interesting. We would humbly suggest, however, that it is because there is little to get excited about when deciding whether or not to have a punt on Sage, the business management software group. Undeniably, the company is well run and, with 6 million customers and plenty of contracts that have secured long-term revenues, it is certainly a good bet for those looking for a defensive share.

The problem is that there appears to be little that might give the stock some oomph. The group issued its full-year results yesterday, saying there was little sign of confidence improving in the small- and medium-sized enterprise sector, which annoyingly is Sage's key market. Its chief executive, Paul Walker, added that there was plenty of pent-up demand among the group's customers but investors would have to be patient.

As much as we think Sage is a decent company, there are others that offer equally good returns and where patience is not necessary. The analysts at Evolution agree, saying: "Sage on 14 times enterprise value to net operating profit after tax [and] is not expensive but there is a lack of share price drivers beyond sheer defensiveness... and so the stock will likely do little."

The group posted adjusted pre-tax profits of £307.5m for the year to 30 September, down 2 per cent in constant currency, on revenues of £1.44bn, 4 per cent lower on the same basis.

Subscription revenue, which bundles software with services and maintenance, grew at 2 per cent, helping to compensate for weak demand for new software, which was down 16 per cent.

We would be minded to avoid the stock, especially since we see little upward movement in the share price for the foreseeable future. But before you jettison the stock, consider that the mundane results were coupled with news that the dividend has been increased by 3 per cent, and we reckon investors would be mad to throw away free money. Hold.

Staffline Group

Our view: Buy

Share price: 77p (+10.5p)

Grocers and food makers argued long before the onset of the recession that they represented a haven for investors. Staffline, the food industry recruitment group, believes the same logic applies to its own business and yesterday it demonstrated further planning for the future by making its third acquisition in five months.

Staffline has bought Peter Rowley, a specialist supplier of training services to the food-processing sector, for £2.5m. Since June, it has snapped up other two small players, The Workplace and Le Gente.

Staffline said it would benefit from cross-selling to clients, although it declined to name which of the UK's biggest grocers and food manufacturers are on its books. To this end, Staffline's management said it only had 3 per cent of the market but was confident of hitting 10 per cent inside the next three years.

Certainly, the company remains a small player, but the City expects it to make improved, adjusted pre-tax profits for 2009 of £3.5m. Partly as it operates in the recruitment sector, which has been badly buffeted by the recession, Staffline's shares now trade on a cheap 2010 price-to-earnings ratio of just five times. Given that there are far more liquid shares out there, investors may have to hang on for a while, but we believe Staffline will grow. Buy.

Numis Corporation

Our view: Hold

Share price: 172p (+10p)

Oliver Hemsley, the chief executive of the investment bank Numis, described the start of its new financial year as "excellent" yesterday, adding that an increasing number of small-cap companies, in which Numis specialises, had started to raise equity.

"Excellent" is in contrast to the last financial year, which Numis reported on yesterday: it slipped to an overall loss of £10.5m, concentrating on healthier looking adjusted profit and cashflow figures. For investors, it was telling that the dividend was increased by 10 per cent, sending the shares up by 6.2 per cent.

Numis's stock has benefited from more confident markets over the past few months, and those investors that managed to sit tight during the woes of last year have done rather nicely.

We agree with Mr Hemsley when he says that a lack of lending by the banks will make equity markets more attractive, but we also share his concern that the jury is still out on whether an economic recovery will be strong: the reaction of markets to news of Dubai's greed catching up it last week, shows that nervousness still pervades.

While investors could do very well from Numis in the next year, we would wait for another positive update on trading. Hold.

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