Numis says higher capital returns possible at Sage, upgrades to 'add'

26th Nov 2014 11:10

Numis Securities has raised its recommendation for accountancy software group Sage from 'hold' to 'add' ahead of the company's annual results next week.Following the appointment of new Sage chief executive Stephen Kelly this month, Numis said that the results, due on 3 December, will be "a clear opportunity for management to re-invigorate the equity story".The broker said Sage has a long-term track record of strong cash generation which has been used for M&A, dividends and share buybacks.The group's net debt-to-earnings before interest, tax, depreciation and amortisation (EBITDA) multiple is currently at 1.0, which implies capital returns of £150m-200m each year.However, Numis estimates that Sage could increase its net debt-to-EBITDA multiple from to 2.5 which would provide an incremental £650m of capital by the year ending September 2017."Whilst, in theory, similar performance could be achieved by acquiring other businesses on Sage's own multiple, the acquisition track record is not strong in our view (indeed, we see a risk of a write-down on the Brazilian acquisitions), and the lower-risk route to generating such performance would be to return capital to shareholders."Numis has lifted its target price for the shares to 449p, implying upside to Wednesday morning's price of 407.25p, up 0.1% on the day.