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1. Executive Summary

The report is set out to estimate market value of Sage Group Plc (the “Company) as of September 30, 2005 (on the basis of last company published accounts). The company is a UK registered, internationally recognised and well established in London stock exchange.

Sage is primarily engaged in the business of Development, distribution & support of business management software & related products for medium sized & smaller businesses, includes applications for accounting, payroll & human resources, CRM & contact management & a range of e-commerce products.

The company value is estimated using 3 techniques;
- Assets - Net Asset Value
- Profits - P/E Ratio
- Cash flow - Discounted Cash Flow

The purpose of this valuation is set to estimate value to purchase or sale of the company. It will compare results with the book value set for the company. The estimates are merely the starting point for negotiations. The ultimate value of a business depends on how much the buyer wants to buy, how much the seller wants to sell and their relative bargaining power.

To reach estimates and find company performance, report looked into company’s business background, 5 years historic financial statements, financial ratios and company performance charts. The performance is compared with average 5 years data with sector and industry where company is operating.

2. Company Background
The Sage Group plc (Sage) is a UK public quoted company and head office located at Newcastle Upon Tyne. The company can be categorized under the standard Industrial Classification (SIC) Code of 7222 (Other Software Consultancy and Supply).

2.1 Nature and History
Fig 2.1: Company key facts
§ 13,000 employees
§ 5.2 million customers
§ Advise 1.5 million customers through support contracts
§ Manage 37,000 customer calls a day
§ Global network of 23,000 reseller partners and 40,000 accountants
Source: http://www.sage.com/

The Sage Group plc (Sage) is a global supplier of accounting and business management software to small and medium-sized enterprises. Sage story began two decades ago, when SAGE established its corporate presence in Newcastle upon Tyne in northern England. The company has operations in Europe, North America, Asia, South Africa and Australia.

A clear business vision and targeted market strategies for the small-to medium–sized business community resulted in early success. By 1989 The Sage Group plc was offered on the London Stock Exchange, and had quickly assumed a position of leadership in the accounting software industry.

2.2 Goals and Objectives
§ To maintain position as a respected global leader in the key markets of the world
§ To find new ways of improving products and services to continue to meet the needs of all customers, wherever they are and whatever they do
§ Provide customers a real and lasting benefits from the Sage brands they know they can trust
§ To continue to grow business and remain the kind of company where people enjoy what they do
(Sage website - 2006)

2.3 Product and Service
Sage develop, sell and support business software that automates business processes. The core products cover accounting; however Sage range of products cover:
· Payroll
· Customer relationship management
· Financial forecasting
· Job Costing
· Human Resources
· Business Intelligence
· Taxation and other products for accountants
· Business Stationery
· Development platforms
· E-business

The company provides solutions for different industries including manufacturing, construction, real estate, distribution, accountancy and non-profit charities, schools and hospitals. The company's products and services are sold through a network of 23,000 reseller partners, as well as directly to the customers from Sage companies. Company generates revenue more from its services than software sales (in 2006 annual results, 64% of revenue generated was from services and 36% from software sales) (Results Sage - 2006)

2.4 Subsidiaries and Brand
The company's subsidiaries include ACCPAC International, Sage Software (formerly Best Software), Ciel, Simultan, Symfonia, Adonix, Verus and UBS. Sage Software sells accounting and business management software such as ACT! (contact management), Peachtree and DacEasy (accounting), and Timeslips (time & billing) in the US and Canada.

The company's brands include Peachtree (North America), Sage CRM, Line 50 (UK), Ciel (France), Simply Accounting (Canada), Softline Pastel (South Africa) and SP PymePlus (Spain).
2.5 Geographic base

Sage Group has a diversified revenue and geographical base. The company offers its services throughout Europe, North America, Asia, South Africa and Australia. In fiscal 2005, the company's North America, Mainland Europe, the UK and Rest of world (includes South Africa, Australia and Asia) geographic segments contributed 40.5%, 27.8%, 22.8% and 8.9%, respectively, to the total revenues, indicating a well spread out geographical revenue base. A diversified revenue base reduces the company's business risks and enables it to exploit opportunities in various markets (Results Sage - 2006).

A diversified revenue base although reduced the company's business risks and enabled it to exploit opportunities in various markets. However, intense competition from leading companies such as SAP, Microsoft in international and Exact, Intuit and Lawson in UK market could erode the company's margins and reduce its profitability in future.

2.6 Company Expectations
As one of the largest suppliers of business management software solutions to the SME market worldwide and presence in high growth, expects high margin markets continues to expand. It has reported strong organic growth in business, demonstrating the strength and potential of existing customer base.

2.7 Acquisition
During the past 5 years, Sage expanded market presence with some significant acquisitions, showing growth and improved margins. It continued of upgrading its product portfolio, releasing new and improved products. Acquisition focused in high-growth segments of the SME market and are likely to boost the company's revenues in the short to medium term.
Sage purchased US-based Best Software, a provider of human resources, payroll, and fixed-asset and planning software in 2000. During 2002 and 2003, the company acquired CPASoftware (accounting software), Timberline Software (construction and real estate software), Grupo SP (small business software), and Softline (enterprise software).
During January 2005, Sage acquired Swiss business management software vendor Simultan, a vendor of accounting and payroll solutions for small and medium-sized businesses (SMEs). Other key acquisitions included Spanish business management software vendor Logic Control Adonix, a vendor of business management software, in France.
The company acquired Verus Financial Management, a provider of merchant services in North America in January 2006. In May 2006, the company acquired 50.2% stake in UBS Corporation, a vendor of business management software for SMEs in Malaysia. In the same month, the company acquired the Chinese distributors SWA and Huatuo Software.

These acquisitions took Sage into new markets and also enhanced its position in existing markets but the products under Sage Umbrella sometimes overlap, such as Peachtree construction module is different and duplicates some of what Timberline offers. Sage is not successful to integrate products portfolio and for customer it is like a maze to find product that suits them.


4. Shareholders Value (past 5 years)
Shareholders value involves creating gains for shareholders via increases in the share price and in the form of dividend payments. Maxmising shareholders value is entirely consistent with the assumed objective of maximising shareholder wealth. Shareholder value can be measured is by ‘Total shareholder return (TSR)’ as a percentage (Pike & Neale 2006).

4.1 Total shareholder return
Total Shareholder Return against FTSE 100 The graph shows, for the last five financial years of the Company, the TSR on a holding of shares in the Company
as against the TSR of the FTSE 100 Index. The chart shows the TSR paid by the Sage against FTSE 100 index and shows weak returns.

4.2 Value Drivers
The following are the key business factors from which we can drive how much value a company is delivering to its shareholders (Pike & Neale – 2006).

§ Sales growth
§ Fixed capital investment
§ Working capital investment
§ Operating profit margin
§ Tax rate on profits
§ The planing horizon
§ The required rate of return

4.3 Growth
Sage has continued to make substantial progress. It delivered organic revenue growth of 6%, with growth in all regions and in both software licences and services. It continued to attract new businesses into its customer base.

Sage growth rates as compare in the table below are well ahead from technology sector as whole and software & programming industry specific.

4.4 Operating Performance
The company has been posting strong operational performance in recent years. Revenues of the company grew at a 18% in the 2005-2006 period. The company's turnover increased from £372.9 million in 2005 to £455.9 million in 2006, representing an increase of 18%. The company's profit (after tax) also increased from £65.9 million in 2005 to £78.5 million in 2005, an increase of 17%. Strong operational performance highlights the company's efficient cost structure, which gives it a competitive advantage.
The UK, one of the key markets for the company recorded an increase of 6.8% in fiscal 2005 over 2004, indicating low penetration of the company. All the other markets recorded double digit growth. The UK accounts for about 23% of the total revenues and low growth in this market could affect the overall performance of the company.

4.5 Return on Shareholders fund
The company has recorded weak returns in the last few years. Its return on average assets and return on investment for the period 2001-2005 were 9.3% and 11.3%, respectively, lower than corresponding industry averages of 10% and 14.3% for the same period. Weak returns indicate the inability of the management to deploy assets profitably, which would negatively affect investor confidence.

Figure 4.2 and 4.3 compare returns on shareholders funds (%) and returns on capital employed (%) between Sage and its competitors industry (software & Programming) for the period 2001-2005. It shows Sage weak performance.

5. Value of equity

Shareholder’s equity represents the equity stake currently held on the books by a firm's equity investors. It is calculated either as a firm's total assets minus its total liabilities, or as share capital plus retained earnings minus treasury shares (Pike & Neale 2006):
1. Shareholder’s Equity = Total Assets – Total Liabilities
2. Shareholder’s Equity = Share Capital + Retained Earning – Treasury Shares

The equity will increase whenever the book value of the business increases.
· new shares are issued
· assets increase
· liabilities decrease
· profits are realized
The equity will decrease whenever the book value of the business decreases.
· shares outstanding in the market are repurchased by the business
· assets decrease
· liabilities increase
· losses are realized
· dividends are paid

5.1 Changes in value of Equity
The changes in company share price for the past year (2006) can be seen in Figure 5.1. The highest share price was 284 and lowest touched 144 per share.

FTSE 100 and Software and Computer services. Sage price remain unstable but same trends can be seen in software and computer services industry. FTSE 100 share price seems stable and smooth. Software and computer industry is reviving worldwide and in UK market in generally.

6. Valuation of equity
Shareholder’s equity value is often referred to as the book value of the company, and it comes from two main sources.

· The first and original source is the money that was originally invested in the company, along with any additional investments made thereafter.

· The second comes from retained earnings that the company is able to accumulate over time through its operations. In most cases, especially when dealing with older companies that have been in business for many years, the retained earnings portion is the largest component.
Both methods are used to estimate company value and are:
§ Assets - Net Asset Value
§ Profits - P/E Ratio
§ Cash flow - Discounted Cash Flow

6.1 Asset Value
This approach is generally considered to yield the minimum benchmark of value for an operating enterprise. The most common methods within this approach are Book Value and Net Asset Value. Book Value represents the net equity of the business based upon generally accepted accounting principles. Net Asset Value represents net equity of the business after assets and liabilities have been adjusted to market values (Pike & Neale – 2006).

Net Asset Value (NAV) = Assets – Liabilities

Net Asset Value

Consolidated Balance Sheet As at 30 September 2005

£’000
£’000
Fixed Assets

Intangible assets

1,127.7
Tangible assets

123.3


1,251.0
Current Assets

Stocks

3.5
Debtors

149.8
Deferred tax asset

8.9
Cash at bank and in hand

69.0


231.4
Current Liabilities

Creditors: amounts falling due within one year
228.3


228.3

Long Term Liabilities

Creditors: amounts falling due after more than one year
176.3

Deferred income
220.0

Equity minority interest
0.2


396.5


NET ASSETS VALUE

857.6



SHARE CAPITAL

857.6

6.2 Price/Earning Ratio
The price/earning ratio is the market price per share divided by the last reported earnings per share (EPS).

P.E Ratio = Price of Share/Earning per share

Table 6.1: P/E information 2005

Sage Group Plc
P/E Ratio (TTM)
21.84
EPS
11.18p
EPS - 5 Yr. Growth Rate
12.51
Beta
1.80
Source: www.investor.reuters.com


Total Shares (m) = 2074.30

Reported EPS = £11.18p

Total earning = Total shares x EPS
= 2074.30 x 0.118
= 244.76 million

P/E ratio = 21.84


Value = Total earning x P/E ratio
= 244.76 x 21.84
= 5345.72 million
6.3 Discounted cash flow
The Discounted Cash Flow method arrives at an estimate of value by determining expected future earnings and then discounting those earnings back to present value using a discount rate that reflects the uncertainty inherent in those earnings (Pike & Neale – 2006).

Table 6.2: DCF value driver information


Sales - 5 Yr. Growth Rate
14.08
Capital Spending - 5 Yr. Growth Rate
18.37
Gross Margin - 5 Yr. Avg.
95.07
EBITDA (£m)
98.8
Beta
1.80
Source: www.investor.reuters.com


Time horizon
5 years from the published accounts of Sage Group Plc as at 30 September 2005.

Value divers and Assumptions
§ Current pre-tax annual profits: £ 205.4m
§ Sales growth : 14.8 % (assume will remain same)
§ Operating profit : 26.44 % ( 5 years average, assume it will remain the company will continue operating profit at this rate)
§ Depreciation: 10% maintained of NBV of fixed assets.
§ Capital Expenditure needs: As it is assume there is no expansion needed in the time horizon, depreciation is a reasonable estimate for replacement.
§ Working Capital changes: It is assumed that there are no changes in working capital requirements
§ Taxes: 30% applied on Net Operating Profits will be paid in year of charge.

Discount Rate
Sage Weighted Average Cost of Capital (WACC) is
It is assumed the discount factor for the company will be 10% and the forecasted cash flow can be discounted at this rate assuming the company will not change its business to adopt a more risky profile.

Projected Cash Flow
The projected cash flows for the next 5 years are:


Now (Year 0)
Year 2005
£m
Year 1Sept. 06
£m
Year 2Sept. 07
£m
Year 3Sept. 08
£m
Year 4Sept. 09
£m
Year 5Sept. 10
£m
Net Operating Profits
205.4
258.8
326.0
410.76
517.49
652.03
Depreciation

125.1
125.1
125.1
125.1
125.1
EBITDA

383.9
451.1
535.86
642.59
777.13







Taxes

-77.64
-97.8
-123.22
-155.24
-195.6
Expenditures

-125.1
-125.1
-125.1
-125.1
-125.1
Change in Net Operating Assets

0
0
0
0
0
Free Cash Flow

116.78
163.82
223.16
297.87
392.05


Discount Factor

0.909
0.826
0.751
0.683
0.621
Present Value

115.87
162.99
222.409
297.187
391.729


Present Value = 1190.16

Terminal Value = No. of years (Horizon period) x EBITDA
= 5 x 98.2
= 491.0 million

Enterprise Value = PV to Year 0 + PV of Terminal Value
= 1190.16 + (491.0 x 1/(1.80)5
= £ 1216.15 million


7. Conclusion
Company value estimate from three approaches reached three different values;
Table 7.1: Comparison of value estimates

£ million Net Asset Value
857.6 Price per Earning
5345.72 Discounted Cash Flow
1216.15 These result obviously depends on the circumstances, value drivers reported and assumption made at the time of valuation.

The Net Asset Value method estimates value as the net cash remaining if all assets are sold in an attempt to get the best possible price for each asset and all liabilities are paid with the proceeds. It is regarded as the minimum acceptable price for the seller, where a firm is in financial deficiency and often used in case of potential insolvency. In case of Sage Group, Net Asset value will not be a fair market value as it is ignoring earning power of the company, intellectual capital and expertise of the company, which is difficult to estimate. Discounted cash flow is based on assumption, and underestimates the company value.

Earning approach is the most acceptable valuation approach as it identifies the intrinsic worth or economic value of assets and business. The importance of this approach increases when the fair market value of the company's assets is more than the book value. In case of Sage Group Plc, the estimate value is 5345.72 million which is higher than market capital (3089.89 million), but show the investment made by the company in recent years, and outlook of company and industry, it seems a fair market value.

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