As long as UK investors continue to undervalue UK software companies compared with US peers, private equity will continue to try to pick them off on the cheap. Last week, Blancco Technology’s (BLTG) board accepted an offer from US private equity group Francisco Partners. The offer values the data erasure software company at £175mn, a 24.6 per cent premium to its pre-announcement closing price.
Given the offer price is still below the high seen in September 2021 of over 280p, the board's backing of the deal smacks of frustration. Blancco has proved that wiping data from servers and obsolete computers has been profitable work. In the two years to December 31, Blancco’s revenue rose more than 30 per cent and its adjusted cash profit (Ebitda) margin was up 3 percentage points to 33 per cent. Yet, its share price fell 20 per cent over the period and had flatlined this year prior to the bid.
Top 10 shareholder Forager Funds believes the board should hold out for a bigger offer. In a letter to shareholders, it argued that the price should be at least 30 per cent higher than Francisco’s offer. It pointed to the margin, which it expects to keep growing, and the big discount the company currently trades at compared with international peers.
“Forager acknowledges the board’s concerns about liquidity and the wider pool of investors and potential investors not properly recognising Blancco’s value, but accepting a miserly 25 per cent premium over the pre-bid share price is not the way to correct it,” it said. Investors representing 47 per cent of the company's shares in issue have backed the buyout, though.
Forager’s recommendation is for the board to search for a higher bid from a different private equity firm, but if that is not possible it believes Blancco should seek a listing elsewhere. “If the stock is being ignored on Aim, the board can seek a listing to a more discerning market like the Nasdaq,” the company added.
Investors start to see the value in Sage
Sage Group's (SGE) recent trading update has continued one of the few good news stories in UK software. The market long had reservations about the company's ability to switch its accountancy software to the cloud. At the end of 2020, Fundsmith sold out of its position, with manager Terry Smith saying in his 2021 shareholder letter that he wanted to see “whether the new management team can make the product fit for purpose in the age of the cloud and subscription software and compete effectively with those who can”.
Since the end of 2020, the company’s share price has risen almost 60 per cent. This upwards trend has accelerated in the past six months, as double-digit recurring revenue growth has proved that Sage's legacy customers have switched to its cloud product. In the nine months to June, year-on-year recurring revenue increased 12 per cent to £1.56bn. This now makes up 96 per cent of the company's total revenue.
In 2017, Sage acquired North American cloud financial management software business Intacct for $850mn. Now North America is the largest and fastest-growing market for the company. In the nine months to June, North American revenue increased by 16 per cent to £702mn, making up 45 per cent of the total.
High-quality software businesses are considered to be those that have recurring revenue growth and cash profit margin figures that equal 40 when added together – named the rule of 40. Sage’s adjusted cash profit margin is expected to expand to 23 at the end of the year which, when combined with 12 per cent sales growth, leaves it only just short. However, the 89 per cent gross margin suggests there is plenty more room for operational leverage as the company scales up.
Broker Peel Hunt sees the growth of Intacct, which is growing at around 30 per cent in North America and has now been introduced into the European market, as the main driver of the business.
Investors have clearly started to see the value of Sage’s business. Its forward price/earnings ratio has expanded to 27 times from a five-year average of 24. This reflects a "high degree of belief in Sage's own confidence in reaching the 'rule of 40' in the long term", said analysts at broker Investec. “Considering the valuation compression in the rest of UK tech, an over 30 times PE [would be] relatively eyepopping,” they added.
Sage’s valuation is now reaching the level of its US peers, but it has taken years of investment and painful cloud transition to reach this point. If Forager can get shareholders to have a little more patience with Blancco (trading at 23 times forward earnings) then they could see the same rewards. Otherwise, it could be another UK company lost on the cheap.
