Full-year profit growth plus a new share buyback gave the Sage Group (LSE: SGE) share price a boost on Wednesday (20 November), pushing it 20% higher in early trading.
“Sage has delivered another successful year, achieving strong, broad-based revenue growth together with significantly higher profits and cash flows,” said CEO Steve Hare.
Cash flow soars
Underlying total revenue grew 9% in the year to 30 September to £2,332m, which is good enough in itself. And on top of that, EBITDA climbed 16% to £622m, thanks in part to a margin rising to 26.6% (from 25% last year).
Underlying earnings per share (EPS) gained a whopping 23% to 37.9p. And free cash flow stormed ahead with a 30% increase, on the back of a 123% cash conversion (from an already impressive 116% in 2023).
Impressed? I had to put my socks back on.
Return that cash
I’m most pleased to see Sage’s stunning cash generation. The board was conservative with its dividend rise, up 6% to 20.45p per share for a modest 1.9% yield on yesterday’s close.
The rest of the spare cash is coming back to shareholders by way of that share buyback programme, worth up to £400m.
I like buybacks, thanks to the long-term boost they can give to per-share measures like earnings and dividends. It’s a bit like getting a special dividend, but having it already reinvested in the company for you without paying any charges.
Outlook
The company does carry debt, but a net debt to EBITDA ratio of 1.2x wouldn’t keep me from buying. No, I’ll base that decision on Sage’s outlook, and on its stock valuation and forecasts.
So what did this update say about the outlook? “We expect organic total revenue growth in FY25 to be 9% or above. Operating margins are expected to trend upwards in FY25 and beyond“.
So that’s further revenue growth at least as strong as this year. And even better margins could push profits up even more.
What’s it worth?
Will I rush out and buy then? Let’s check on Sage’s valuation. Based on these underlying figures, we’re looking at a trailing price-to-earning (P/E) ratio of 33.6, which makes me pause. This year’s EPS is already ahead of 2025 forecasts, so the P/E of 25 predicted for 2026 looks set to be adjusted.
For a company with the kind of growth prospects seen at Sage, I could rate that as a bargain price. My problem though, is that I really don’t know how long these growth rates can keep going.
Slowing growth?
A lot of the latest gains have come from a migration to Sage’s cloud-based business software. But how much is one-off profit from the initial move to higher-margin services?
I don’t know how to judge that, and I don’t go for growth stocks unless I’m really confident.
But then I look at an annualised recurring revenue rise of 11% this year. And it means I won’t rule it out. I’ll keep watching.
