National Grid Transco has staying power

Sage may have fans in the City but software rivals threaten its fortunes; Rage only for the player who wants a challenge

It wasn't a bad start to the honeymoon: there was a 3 per cent uplift on the first day of trading yesterday for shares in National Grid Transco (the married name for Lattice and National Grid, who were officially spliced by the UK courts at the end of last week).

The pair have got together to create a powerhouse in the energy sector, marrying the UK's countrywide electricity transmission network with Transco, the national gas pipelines company. The nil-premium merger has created a company worth £14bn with enough firepower to expand aggressively in the US market.

The return on capital investment to be made in the US is much higher than over here, where the regulatory framework is much tougher. National Grid has an impressive reputation for its overseas expansion and for integrating new businesses, such as its £5.5bn purchase of Niagra Mohawk in upstate New York.

The possible break-up of Lattice will free cash to be diverted across the Atlantic, where it will be put to better use for shareholders. The US energy transmission market is in a state of turmoil and there is a political will growing for consolidation. National Grid Transco plans to play its part.

National Grid is writing off £775m of disastrous investment in telecoms that, with the notable exception of the flotation of Energis, has been the only blot on the corporate copybook. Beyond that, the management team, under the Grid's Roger Urwin as chief executive, has a stirling reputation and is worth backing.

National Grid Transco has promised £100m of cost savings, but no one expects the cuts to stop there. Beating regulators' efficiency targets is the key to its profitability, so beating its own should be a gas. The acquired businesses in the north-east of the US also have more fat that can be cut.

The new group promises a progressive dividend policy, and, at the current share price, has a prospective yield of more than 3.5 per cent. That may look relatively modest compared with some of the consumer focused utilities, but it is well underpinned and is accompanied by less risky expansion plans.

The shares trade on a price-earnings multiple of 15, which looks about right. Hold.

Sage may have fans in the City but software rivals threaten its fortunes

Given the current tough market conditions have wrong-footed many software firms, Sage, which sells accounting software to small and mediums sized businesses, is a rare beast indeed. So rare, it is now the only tech company left in the FTSE 100.

Sage fans, and there are many in the City, will tell you it deserves its premium to the sector and to the market as a whole because of its excellent track record and resilience in tough times.

They point to its three million or so customer base, which means it is not reliant on any one particular client for a large slug of sales. And about 60 per cent of revenues come from high-margin service contracts that are easy to predict and which make it less dependant on selling software to brand new customers – always tougher.

Pre-tax profits for the year to 30 September, Sage said yesterday, will be in line with current market expectations of £134m to £139m. That is up from £121m last year, better than the backwards performance of many as the sector suffers a hangover from the tech splurge around the Millennium.

That sort of outperformance explains why the company is trading on a forward multiple of about 19 times this year's earnings, falling only to 17 times next year. The share price collapse suffered by the chip designer ARM Holdings shows that a premium rating can evaporate if there is a single slip up.

In the case of Sage, there is increasing competitive pressure from the likes of the US software giant Microsoft and SAP. That could pose a real challenge to growth and force Sage to spend more on research and development.

Analysts at Morgan Stanley are among the few in the investment community to have their reservations about Sage. They have an 85p price target on the stock and fear, in particular, the competitive threat.

Sage shares, up 2.75p at 140p last night, are well beneath their 2000 high of 930p and have also fallen a long way this year. But, given the risks, and in the absence of an obvious catalyst to boost the stock, Sage is still looking pricey.

Rage only for the player who wants a challenge

Rage software dropped the Software from its name in June. It was grimly appropriate given that there has been all too little software and all too much shareholder rage out of this company. Missed opportunities and financial chaos have abounded and even yesterday's financial results – the first since a rescue fundraising in the summer – were spoilt by the last-minute inclusion, at the insistence of Rage's auditors, of a £1.1m provision against unpaid debts in the US.

Shame. There was the stirrings of a recovery in the business, which designs and publishes computer games including David Beckham Soccer and, now, a boxing game based on the Rocky films. Reviews and advance orders for Rocky have been positive indeed.

Rage says its "significant investment over the last few years and acquisition of licences was planned to coincide with the predicted growth in the industry" brought about by the launch of a new generation of consoles including the Sony PlayStation2 and the Xbox.

Leaving aside that it should have been planned in a way that didn't take the company to the verge of Game Over, the £4.5m refinancing has provided a breathing space.

Turnover in the year to June was up 115 per cent and pre-tax losses narrowed a little to £16.1m, but the real benefits will be felt in the coming year now it has slashed costs and disposed of loss-making design studios. It is expected to turn cash positive in December.

That, and the development of new games based on the novels of Andy McNab and the Lamborghini brand, could take Rage shares to the next level. But, up 0.25p to a lowly 1.5p yesterday, they reflect the disappointments of the past and the challenges of the future, and are only for the brave.