The Sage Group PLC (LSE:SGE) shares jumped to a new all-time high on Wednesday after it announced reassuring results and a £400 million share buyback, but some analysts reckon the group's growth rates have reached a plateau.
Full-year sales grew 9.2% organically, in line with the average analyst forecast, while revenue for its 'cloud-native' products grew 22% on an organic basis to make up 31% of the total.
Sage's annual recurring revenue grew 10.5%, little changed from 10.8% at the mid-year and 11.3% at the start of the year, but UBS analysts said they believe the "hurdle" was 10%-plus.
On the outlook, guidance was introduced for organic revenue growth to be 9% or above, versus the current consensus nearer to 9%. Management also expects operating margins "to trend upwards", which analyst Damindu Jayaweera at Peel Hunt said looked ahead of consensus.
But Jayaweera had some issues with the results.
"While the firm announced a £400 million share buyback, there was no evidence of European Intacct penetration, with European growth of just 6% (8% recurring). This is a key future growth catalyst," he said.
He said the share price multiple of 25 times forecast next year's earnings "suggests Sage is not cheap", but this is a discount to accounting software peers which are on 33x and wider B2B peers on 27.3x.
"Delivering cloud-native growth across Europe, via its Intacct product, should lift overall growth to double digits and trigger a rerating, in our view," he said, while noting that the high growth in cloud-native products from 2021 has slowed and "will likely continue to fall as it runs into the law of large numbers".
"Unless Sage can unlock new avenues for growth, we expect to see group growth rates plateau below double digits and they could even decline in the medium term," he said.
Adding specialised versions of Intaact for different industries, such as Intacct for construction, is one way of trying to unlock growth, "but we believe the larger opportunity lies closer to home".
With the global accounting software size calculated at $15-20 billion, with Intuit, which owns Sage competitor Quickbooks, quoting its US opportunity alone at circa $17 billion, Jayaweera said the UK and Europe combined "present an opportunity of a similar size".
However, the UK and Europe growth rates again lagged behind the US, "and we need to see more evidence of an acceleration in order to revisit our hold recommendation", he said.
Broker Panmure Liberum analyst Harvey Robinson pointed out that recent quarters for Intuit's Quickbooks of 19% , Xero at +25% and Oracle's Netsuite at +20% show they are growing faster, which he said is why he has Sage on a 'hold' rating too.
Martin O’Sullivan at Shore Capital, also a 'hold', said his view remained that Sage’s organic revenue growth prospects "remain promising and resilient" but driving organic revenue growth materially above the 10% level as the market expects "is a much more challenging task" than going from 3% organic revenue growth in 2021 to where it is now.
That previous growth benefited from a shrinking base of Sage's non-cloud revenues and "has largely played out".
Nevertheless, O’Sullivan said he anticipates ongoing good underlying total revenue growth performance (9.4% and 9.8% in 2025 and 2026), slightly below consensus, and "gently rising" margins, underpinned by the further global roll out of Sage’s cloud solutions, new customer acquisition and increased value to existing customers.
The shares had underperformed the FTSE All Share Index, he noted, reflecting the derating of the stock due to worries around organic growth.
"We remain of the view that a significant or sustained derating from current levels is unlikely given intact margin expansion and still good top-line growth prospects (further evidenced by today’s FY24A results and outlook).
"Overall, we believe the group’s stock is fairly valued for its organic growth prospects and we do not expect the share price to diverge significantly from current levels within the next 3-6 months," O’Sullivan said.
That was before the shares jumped 18% on Wednesday morning.