Sage shares dip despite results

Investment: Analysts doubt the accounting software supplier can maintain growth

SAGE LEARNED yesterday that life is not always easy as a highly- rated technology stock. The accounting software supplier has seen its share price double in the past 12 months. But yesterday its shares dipped 47.5p to 1460p, even though it turned in a strong set of full-year results.

Industry observers said the dip in share price was the result of profit- taking. "The shares had a strong run ahead of the results," one City analyst said. "It is one of the most expensive technology stocks in Europe on a p/e ratio relative to growth."

On profit forecasts for 1999 of pounds 60m, Sage shares trade on a multiple of 42-times expected earnings - high even for an information technology company.

Not that anyone is criticising Sage's performance. True to form, Sage reported pre-tax profits up 27 per cent to pounds 47.6m - its 13th successive year of growth. The rise was boosted by a first-time contribution from State of the Art, the US software supplier that Sage bought for pounds 159m earlier this year.

In seven months, the business contributed operating profits of pounds 6.1m on sales of pounds 30.8m. "It exceeded our expectations," said Paul Walker, Sage's chief executive. "And we think there is a lot more to get out of it."

However, Sage's organic growth was more pedestrian, with operating profits from the ongoing business rising 13.5 per cent. In the UK, the company's traditional market and main source of profit, Sage grew by taking market share from its smaller rivals. However, results in Germany were hit by a change to the company's policy of selling licences. Mr Walker is confident that the German market will recover in 1999.

Investors are increasingly wondering whether Sage can maintain its rate of growth. But Michael Jackson, the Sage chairman, said the "new year had already started strongly".

According to the company, 85 per cent of its customers - which are mostly small and medium-sized businesses - have not yet prepared for the millennium bug. The company is giving away free software upgrades to customers, which should stimulate them to sign up for its long-term support contracts, bringing in a steady stream of revenue. Meanwhile, Sage is also adding products to its portfolio. Mr Walker points out that the company has started selling products that deal with human resources and profit forecasting. It is also offering its products to larger customers, raising the prospect of Sage taking on competitors that supply `enterprise resource planning' software - packages that enable companies to run their entire business on a single system. But Mr Walker knocks back suggestions that Sage will take on giants such as SAP, pointing out that the German software group has traditionally only dealt with huge multinational enterprises.

One potential area for expansion is the Internet. Sage is talking with Internet providers about providing its customers with a complete package which would allow them to put some of their finance operations on-line.

But the City is sceptical about these steps making a difference. Although analysts are full of admiration for the company's management and business model, which delivers long-term, predictable, earnings streams, few can make a case for buying the shares. As one sceptic said: "The shares are obviously overpriced. The only question is how long that will last."