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sage (LSE: SGE) continues to ship top quality and excessive revenue margins FTSE100 A software program enterprise with sturdy recurring income and constant development.
Nevertheless, the cloud-based monetary instruments supplier is down 22% from its 12-month excessive of £13.48 on February 6.
The important thing query for me as a shareholder is how does this translate into worth as distinct from worth (worth displays the basics of the underlying enterprise, whereas worth is solely what the market pays on the time)?
So does Sage seem like a deal I can not go up proper now?
fundamental
The inventory worth of any firm is finally decided by its income (revenue) development over the long run. The danger for Sage is that rising rates of interest and tight credit score will make corporations extra cautious about beginning or increasing operations. Because of this, software program suppliers’ onboarding of latest prospects is understandably sluggish.
That stated, analysts’ consensus forecast is for group income to rise by a median of 11.9% a yr by the tip of 2028.
These predictions look like very nicely based primarily based on latest outcomes. Full-year 2025 figures revealed on November 19 confirmed underlying gross income to be £2.513 billion, up 10% on the earlier yr. This was pushed by the corporate’s subscription-based recurring income mannequin.
In the meantime, underlying working revenue elevated by 17% to £600m. This resulted in an extra 1.5 share level improve in revenue margins to 23.9% because of disciplined value administration.
The corporate achieved sturdy money efficiency, changing 110% of underlying income into money because of elevated subscription income. And it had £1 billion of liquidity on its steadiness sheet.
The corporate additionally introduced a £300m share buyback program, reflecting its confidence within the firm’s sturdy monetary place and development prospects. Such measures may assist inventory worth appreciation.
So, is it a cut price?
Evaluating Sage’s key metrics to these of its friends can reveal a major cut price. The corporate’s price-to-earnings ratio of 27.7 is the bottom amongst its peer group, which averages 37.3. This consists of: gross sales drive At 33.7, SAP At 34.9, oracle At 37 years previous, and instinct At 43.7.
Its price-to-sales ratio of 4.1 can also be on the backside of the group, but it surely appears very low-cost.
However that is the place the restrictions of relative valuation actually emerge. If a whole sector is overvalued, it could possibly make different shares look low-cost by comparability, whether or not or not that is true.
To get the reality, I all the time use a reduced money circulation mannequin. This gives a transparent, unbiased valuation. That is achieved through the use of money circulation forecasts for the underlying enterprise, which additionally replicate consensus income development forecasts.
These and my very own calculations (together with a reduction fee of 9.2%) present that Sage could also be overvalued by 15% at its present worth of £10.45. Its honest worth is subsequently £9.09.
In fact, different analysts’ DCF modeling might produce extra bullish or bearish outcomes.
my funding perspective
I imagine Sage’s sturdy anticipated earnings development, if sustained, will assist future share worth appreciation.
Nevertheless, I additionally imagine that present expectations are virtually utterly factored into the present valuation. Given this, I am pleased to proceed holding shares within the firm, however I am not wanting so as to add extra shares on the present worth.
As an alternative, I am different FTSE shares at a major low cost to honest worth.