Thursday, 29 November 2007

Boring, Boring

Yesterday, there was significant news from my only two remaining Holway Boring Award holders**

“Boring” Capita
Capita announced a 15-year £722m contract with Prudential UK to take on the administration of 7m life and pensions policies. This is Capita’s largest deal to date. They are now set to dominate the UK life & pensions market. Capita will take on 3000 of the Pru’s staff – interesting because1250 of these are in India. (I have often criticised Capita for not embracing the offshore model fast enough. So this is a significant move in its own right as it nearly doubles Capita’s Mumbai headcount to 3000)

Capita leads the UK BPO market by a country mile. Indeed, if Capita can’t quite be awarded the title of inventing BPO in the UK, they certainly were the firm that put it on the map. They dominate UK BPO both in the private and public sectors.

The great thing about BPO is its predictable revenue stream. Indeed Capita could stop selling now and would still be making halfway decent profits in 3-5 years time. BPO might well be “boring” in its proper sense, but the profits and margins that Capita makes from this activity are not. Its current Operating Profit margin exceeds 12% - something that most IT Services companies would die for.

“Boring” Sage
My other Boring Award holder is Sage who yesterday announced their full year results to 30th Sept 07. They broke through the £1b revenue barrier for the first time reporting a 30% rise to £1.15b. As if to demonstrate that Sage is really becoming “Boringly Mature”, it upped its dividend to 7p. So you now get a 3.3% yield on Sage shares (compared to 1.25% on Capita) I remember only a few years back when Sage (and indeed the whole of the UK SITS sector) paid no dividends at all. If you wanted a dividend you invested in a bank or a utility – indeed Sage is starting to resemble a ‘software utility’ with its 50%+ revenues coming from its support contracts.

But this set of Sage results is not without its problem areas. Indeed they only retained their Boring Award by the slimmest of margins as EPS was up by a minute 0.3% (11.81p to 11.84p) Rather too close for comfort for me!

Could they lose it? Well, if they don’t get a grip on their US operations (which account for 44% of revenues ) that could well happen. Organic growth in the US was ‘just’ 4%. The US problem is even more concerning as Sage has two US top posts still vacate. Indeed one of those is at Emdeon – Sage’s healthcare operations which account for 31% of Sage’s US revenues.

My support for Sage has always been based around their “Stick to the Knitting” approach. Good at business accounting systems for SMEs – so let’s take that core competence and replicate it around the globe. Magic! Except, I’m very unsure how heathcare IT fits in here. Indeed Emdeon recorded a mere 1% growth in the last six months.

But having said all that, Sage continues to power ahead outside the US – organic growth of 7% in the UK, 10% in Europe and 17% in the RoW. Sage’s strong support revenue base will help them in a recession. Indeed, if there is a downturn Sage might be able to start making acquisitions again if the “price is right”.

And, of course, if all else fails, investors can always take solace in our oft-repeated view that Sage will eventually get bought – probably by one of its two biggest competitors (Microsoft and Intuit)

** A company can only get a Holway Boring Award if it achieves TEN years of uninterrupted earnings per share growth. Only UK currently quoted SITS companies are eligible. Admiral was the first recipient. Indeed, the term “Boring” came from a misprint in the FT in 1992 when I was quoted as saying that Admiral’s results were "boring”. I’d actually said “boringly consistent”! Admiral kept their coveted Boring award until they were acquired by CMG in 2000.

Now, of all the 400+ SITS companies quoted at some time or another on the UK Stock Exchange (Main, AIM and USM), only two still have a Boring Award. Sage and Capita have not had a reversal in EPS in any year since their IPOs (both coincidently in 1989). That is a truly remarkable performance.

“Boring” has been good for shareholders too. An investment in Sage’s IPO in 1989 would now be worth 81-times more. Capita’s shareholders have done even better with a 194-times increase since 1989. Again, these are the two best performing SITS shares of any currently quoted. Indeed, I suspect the ‘best of all time’.

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