Hugh Yarrow, lead porfolio manager of Evenlode Income (GB00B40Y5R17) is putting his money on software company Sage Group (SGE), which he believes has innovative potential to back up its market-leading position.
"Sage is the global market leader in the provision of enterprise software for small and medium-sized businesses," he says. "It sells to more than 6 million customers in 160 countries. Its products, such as accountancy software, become embedded in the day-to-day running of businesses. Customer loyalty is high: 73 per cent of Sage's revenue is recurring, and this revenue stream is growing at more than 8 per cent a year, with renewal rates at 84 per cent.
"With such a strong incumbent position, there will always be a temptation for a Sage-like company to rest on its laurels and milk its position. Less investment in new product development in any one year means more operating margin and free cash flow, but abusing hard-won relationships with customers can be expensive in the long-run.
"We have been encouraged by the new management's attitude in balancing this trade-off between returns today and the health of the long-term franchise - particularly in light of the software industry's current move to the cloud, which requires some careful navigation on Sage’s part. Management have guided investors to a steady operating margin while they undergo this major investment programme.
"The firm is particularly focused on driving greater innovation rates and speed-to-market in their software engineering function, a focus which is already beginning to bear fruit. A recent dividend increase of more than 8 per cent reflects their ability to generate cash while investing significantly in the future."
Investors Chronicle's latest view on Sage Group was 'hold' at 518p on 6 May 2015. We said: "The shares trade at 22 times forecast earnings, a premium to global peers. Nothing to get excited about here." As at 15 June 2015, Sage was trading at 546.2p.
