Sage attacking 17-year high

Sage's weaker-than-expected start to the financial year had the City boo-boys patting themselves on the back and the share price below 600p for the first time since June. But the accountancy software giant had already warned that growth would pick up in the second half, and now, six months in, chiefs are confident that full-year revenue will beat guidance and that margins will improve sharply.

Underlying revenue grew a consensus-beating 5.7% to £912 million in the six months to 31 March. Implication here is that revenue grew a much faster-than-expected 6.3% in the second quarter after posting just 5.1% in the first three months, and chief executive Stephen Kelly is "very confident" of topping the promised 6% for the full-year.

"There are clear signs our strategy is working," cheered Kelly, referring to his transformation plan, launched shortly after he took the top job two years ago.

Ongoing migration from SQL Server Reporting Services (SSRS) to more lucrative software subscription pricing is paying off - recurring revenue grew at 10%, with subscriptions up 31% and a better-than-feared decline of 8% in SSRS.

As promised, underlying operating profit margin will be "at least 27%", up from at 25.1% at the half-way stage. "We expect our strong Q2 performance to continue into H2 with accelerating momentum as we exit FY17," added Kelly.

That'll be driven by greater focus on new customer acquisition, with Sage, which is offloading its North American payments business, pumping sales of new products developed over the past couple of years, including cloud accounting.

These numbers will be viewed as a "relief", according to Goldman Sachs, and a trigger for Wednesday's 4.5% rally to a six-month high at 716p for a 15% gain in the past month.

At 706p currently, Sage trades on 19 times Goldman's earnings per share (EPS) forecasts of 36.4p for the year to September 2018, and 20 times consensus estimates of 35p.

And it's valuation that has City number crunchers crossing swords.

Goldman thinks Sage deserves a price/earnings (PE) ratio of 21. Multiply that by calendar-year earnings and the price target comes out at a colossal 860p. "We believe Sage offers a good combination of defensive characteristics (c.70% recurring revenue), as well as sound geographic diversification amidst the current uncertainty in the market," the broker says.

However, Adam Wood at Morgan Stanley sees it very differently. Using a target multiple of 15 times - in-line with Sage's long-term average – gives a target of only 540p.

Looking back through the numbers, Sage shares have traded largely between 20 and 22 times since Kelly arrived at the end of 2014, and often in the high-teens before that.

And there's an interesting technical angle here, too. The share price has now burst back above the uptrend begun in autumn 2014. It's also through the key 62% Fibonacci retracement of the decline from last year's 17-year high to the low following January's first-quarter results.

That there's momentum here is obvious. Whether it's enough to trouble last October's 761p - the highest since the heady days of summer 2000 when the dotcom boom was unravelling – is unclear.

The shares have already done a lot and chart watchers will be wary of a possible double-top at around the 750-760p level. However, business is improving, management is doing what it said it would, and Sage shares have proved before that they can move, and move fast.

Decision for investors now is whether they're Goldman Sachs or Morgan Stanley.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.