Broker tips: Sage, Cranswick, BAE Systems

Bank of America has lifted its target price for business software group Sage, saying the company is "ticking all the boxes" with its solid top-line growth, margin expansion and a new share buyback.

Sage impressed the market on Wednesday with its results for the year to September 2023, in which revenues grew 10%, with recurring revenues increasing 11%, and a 140 basis-point increase in operating profit margins to 20.9%.

The company also guided to similar revenue growth in current financial year, ahead of consensus estimates of 9.3%, and announced a new £350m buyback equivalent to 3.5% of its market cap.

Bank of America said the results showed "no sign of macro pressure as demand remains unabated".

"We see Q4 as another strong data point supporting our positive thesis on Sage," the bank said, citing impressive recurring revenue growth, a supporting pricing environment, and a strong recovery in margins after they dropped over the past four years.

Bank of America also highlighted the stock's valuation, with the EV/EBITDA multiple at just 19.6x, which remains at a 40% discount to its US-listed peer Intuit at 32.7x.

The bank has raised its target price for the shares from 1,150p to 1,300p and reiterated its 'buy' recommendation.

Analysts at Berenberg raised their target price on food manufacturing group Cranswick from 4,620.0p to 4,694.0p on Thursday, stating it expects to see the group's market share gains continue.

Berenberg said Cranswick's competitive moat was expanding as its market share increases on the back of the outperformance of its key customers, as well as capital investment that has delivered capability improvement.

The German bank, which reiterated its 'buy' rating on the stock, said Cranswick's interim results had depicted this phenomenon, with Cranswick's key customers outperforming peers and delivering market share expansion to the firm on the back of "significant investment" in productivity and efficiency improvements.

Berenberg also noted that Cranswick will now look to continue to pursue investment in capability expansion and partner with its key customers to deliver growth in underdeveloped opportunities such as pet food, the result of which it expects to be an increase in return on capital employed, top-line growth acceleration and a possible rerating catalyst.

"ROCE expanded 54 basis points year-on-year to 16.4% in H1 2024, reflecting management's commitment to expand capability in pursuit of underdeveloped growth opportunities. The commitment to capability enhancement was rewarded in H1 2024 through newly won value-added

poultry business. We expect the ramp-up of pet food volumes in FY 2025 to enable ROCE to further expand towards the high-teens level to which management intends to return (we model pre-tax ROCE of 18.1% in FY 2026)," said Berenberg.

"Further, we highlight the strength of the balance sheet, the strong cash generation, and the opportunity pipeline ahead as levers for management to pull in order to widen the capability gap versus peers."

JPMorgan Cazenove lifted its price target on BAE Systems on Thursday to 1,300p from 1,150p, after hosting the company’s chief executive and chief financial officer at its UK Leaders Conference.

The bank said it came away from the event "incrementally positive" on BAE’s investment case.

"BAE faces a decade of growth and visibility," JPM said. "It has strong free cash flow, which should mean it continues to pay an attractive dividend and buy back stock every year (which we assume in our forecast through to 2027)."

JPM noted that BAE has a five-year rolling business plan. The latest plan - just completed - sees 5-7% organic sales growth for the next five years.

"However, CEO Charles Woodburn expects similar growth in the following five years driven by the two major wins of the last 12 months: the GCAP fighter jet (UK/Italy/Japan) and AUKUS submarine (Australia/UK/US)," it said.

The bank said it also believes that BAE has a far lower risk profile today than in the past.

JPM rates the shares at ‘overweight’.