Stephen Yiu, manager of the Blue Whale Growth fund, believes troubled accountancy software provider Sage (SGE), a top holding for star fund managers Nick Train and Terry Smith, has left it too late to catch up with rivals Intuit (INTU.O) and Xero (XRO.AX).
Sage has been among the worst performing shares in the FTSE 100 in 2018, losing 30% since the turn of the year. A profit warning in April was followed by the culling of 30 senior executives in May and the departure of chief executive Stephen Kelly in August.
The company is a longstanding holding for Citywire AA-rated Nick Train and is the 10th largest position in both his £5.7 billion Lindsell Train UK Equity fund and £313 million Finsbury Growth & Income (FGT) investment trust.
'The competition is killing it slowly'
Yiu (pictured), whose Blue Whale Growth fund has positioned itself as a rival to Fundsmith and Lindsell Train, said Sage was wilting under the challenge of US rival, and comparative giant, Intuit, as well as smaller Australian challenger Xero.
‘It is a value trap so it looks cheap and it’s not going to go bust but the competition is killing it slowly,’ he said. ‘This will continue unless something dramatic changes but it does not even have a chief executive.’
Yiu said as the incumbent in the market, Sage had been ‘complacent’ and was now playing catch up with Intuit and Xero, which have both made greater progress in cloud computing.
He said Sage was suffering in particular at the hands of much larger rival Intuit, which boasts a market capitalisation of $54.8 billion (£41.7 billion) versus Sage's £6.1 billion, and had been able to spend more on research and development.
‘Sage is catching up but Intuit isn’t going to sit back, it is not stopping [development],’ said Yiu. ‘How do you catch up? You cannot, it’s too late.’
Yiu owns Intuit in his £80 million fund, which has got off to a strong start since launching in September last year. Smith meanwhile bought into the stock in his Fundsmith Equity fund last year, while Train owns it in his £5.3 billion Lindsell Train Global Equity fund.
Incumbency 'not necessarily a bad thing'
Train (pictured) acknowledged the difficulties facing Sage in his latest update to investors in his Lindsell Train UK Equity fund.
He said he was 'surprised' by the sudden dismissal of Kelly and that he had been 'discomforted' by the 'very public' sacking of executives earlier in the year.
'That public sacrifice smacked, fairly or not, of senior officers of the
company diverting responsibility for not hitting their own targets away from themselves and on to employees,' he said.
While Sage has acknowledged it had been slow to latch on the potential of cloud computing for its customers, Train said he had long been encouraging the company to grapple with the issue.
'We have known this ourselves for many years and have persistently encouraged Sage to take the actions required to avoid the fate of the companies described in Clayton Christenson’s classic study of corporate complacency, The Innovator’s Dilemma,' he said.
But Train added that incumbency was 'not necessarily a bad thing' and despite increased competition it had ‘powerful’ advantages, including a three million-strong customer base that generates high margins and cash.
He said that the service Sage offers was ‘highly valuable’ to its customers and the business was not going to ‘evaporate in a puff of smoke’.
Train said that while Intuit and Xero were becoming more successful ‘investors know this already’.
‘Xero is valued at 18 times its annual sales, while Intuit, which we own in our global strategies, trades on 10 times sales,’ said Train.
‘Meanwhile, Sage now sells on 3.5 times sales. This is both a warning that Sage’s cost of capital will continue to rise relative to its rivals, if it cannot match their success. But it is also an indication of the value gap that could close if Sage can execute on its technology transition.’