Nick Train defends ousted Sage boss

Star equities manager caught off guard by Stephen Kelly’s exit

Nick Train has questioned the ouster of Sage boss Stephen Kelly and admitted he was caught by surprise when the chief executive of one of his largest holdings suddenly exited.

Kelly was dismissed as chief executive in late August after four years in the job.

“We are forced to assume that his departure was considered an urgent priority, given its abruptness in the middle of a half year trading period,” Train said in the Finsbury Growth & Income investment trust’s September fact sheet.

Sage accounts for 5% of the £1.4bn investment trust portfolio. Sage is in the process of hiring a new boss while Kelly remains available to the business until May 2019.

CFO and interim COO Steve Hare has full executive authority to run the business until the appointment of the new CEO.

Sage guidance doesn’t mix with CEO ouster

While Train said he was surprised about Kelly’s exit, he was not surprised by Sage’s subsequent share price weakness. However, he said he would stick by the accounting software business, noting it is currently trading at 3.5x sales, much lower than younger rivals like Xero and Intuit.

He said: “It is common for a CEO to leave at short notice when either trading falls woefully short of expectations or when the CEO has put his or her name to a big acquisition that turns out to be a lemon. However, neither appears to be the case.

Sage reaffirmed its guidance for the current year, anticipating around 7% organic revenue growth and around 27.5% organic operating margin. Train added that the £650m Intacct deal, which happened under Kelly, has met expectations.

Incumbent lags on cloud services

While Train acknowledged Sage had been slow to adopt cloud services, he said this was already priced in by shareholders.

Xero is trading at 18x annual sales and Intuit is trading at 10x 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.”

Kelly had “at least introduced a sense of urgency” to the company’s innovation efforts, he said.

Furthermore, he highlighted the help Sage provides to its global customer base with tax, accounts and regulation. Each year, it has 9 million interactions with customers.

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