WISE investors have long recognised the qualities of Sage, the Newcastle-based software group that supplies a third of UK businesses with accountancy software. Britain’s largest listed software firm has delivered steady growth over the past three years by making itself synonymous with back- office kit for companies that have fewer than 100 staff.

Sage’s sales of accounting and payroll software are often worth less than £200, but as there are more than 4.7 million of them, they add up. The group also makes half of its revenues from support contracts — providing help-desk services to companies that are too small for in-house teams.

Around 5 to 6 per cent of Sage’s annual growth is generated organically by encouraging customers to buy more expensive products and more services. Another tactic is to buy lots of small rivals, offering similar products, and then drive the margins up, a skill at which Sage so far has been incredibly successful.

Despite the robust performance, analysts have yearned for something that would trigger a re-rating. Yesterday’s acquisition, the biggest for five years, could be that trigger. Sage wants to connect the back office with the front office and the purchase of Verus Financial Managment, the United States-based merchant services provider, will take it a long way towards that goal. Verus, based in Nashville, processes customer transactions through credit cards, debit cards and cheques. The idea is to integrate Verus’s services with Sage’s accounting solutions so that when a customer’s purchase is processed, a book-keeping entry is automatically generated for the firm’s accounts.

The £184 million cash deal could prove to be a turning point for the group. Microsoft, for one, has been eyeing the lucrative territory occupied by Sage, so this entry into the front-office world and the whole area of business process outsourcing will keep Sage one step ahead of the behemoth.

Expect further acquisitions, some equally chunky, this year, as the company has indicated that it will gear up and increase its net debt from about £100 million to £600 million in 2006. Growth should also come from geographical expansion, with Sage investigating China and Italy.

With 1.3 million business customers worldwide paying for renewable service contracts, Sage would also be a valuable prize for a predator. Buy.

Premier Foods

OWNING a household food brand does not guarantee success, as 850 unfortunate employees of Golden Wonder, the Leicestershire crisps maker, discovered yesterday. Golden Wonder’s private owners placed the snack maker into administration, blaming increased competition. Higher energy prices, particularly for processing-intensive products such as crisps, are also likely to have contributed to Golden Wonder’s desperate loss-making position, but, as Premier Foods showed yesterday, these challenges can be overcome.

Premier, home of Loyd Grossman sauces and Bird’s custard, used a final trading update before reporting its 2005 figures to assure investors that profits would be in line with expectations. Market reaction was positive — Premier Foods’ shares jumped 14½p to 313½p — as investors expressed their relief that challenging trading conditions had been offset by good management.

Only three months ago, sentiment was not nearly so positive. A trading statement from RHM, a rival listed foods group, confirmed that sales of Mr Kipling’s cakes were far from exceedingly good and the shares promptly sank. The rout of RHM’s shares hit Premier Foods as well, as investors took fright at the prospects for the whole sector.

Yesterday’s update from Premier Foods seemed to allay those fears. Despite describing the oil price-related energy cost increases as “exceptional”, Robert Schofield, Premier Foods’ chief executive, declared a “satisfactory level” of success in increasing product prices, thereby passing on the higher input costs to customers. Weak October sales were offset by a stronger-than-anticipated Christmas trading period, and Premier Foods’ like-for-like grocery sales are up 2 per cent year-on-year. Cruciallly, profit margins for 2005 will be in line with market forecasts.

Analysts expect Premier to produce earnings per share of about 27p this year, which means the company’s shares are trading on an undemanding 11.6 times forward multiple, underwritten by a 4.5 per cent yield. It makes Premier Foods an appetising prospect. Buy.

GW

THE sweetly scented clouds of smoke hanging over the shares of GW Pharmaceuticals, the fledgeling biotech company trying to develop a painkiller from the cannabis plant, are beginning to clear.

A stream of cheery news has helped to waft the shares higher, culminating last week with the disclosure that American regulators have agreed to fast-track approval of Sativex, the company’s main drug, by allowing scientists to jump straight to Phase-III tests.

Moreover, the company has worked hard to build up a stash of cash: a licensing deal with Almirall Pharmaceuticals, of Spain, and an opportunistic fundraising in the United States last week have generated enough working capital to last 18 months or so. That should be sufficient to ease the fears of those investors who had suspected that the latest run-up in the shares might tempt GW into a big fundraising.

However, GW continues to make a hash of Sativex’s prospects in Britain, where the drug is almost three years behind schedule. Avoid until the fog has lifted completely.

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