Marriage and Divorce Corporate Style (Part 2)

And Vodafone PLC

Hindu wedding courtesy Wikipedia 

Bumi PLC 

In 2010, the financier Nat Rothschild invested the funds of a cash shell, Vallar PLC, that had raised 700 million pounds via an Initial Public Offering, in Bumi PLC. The Indonesian industrialist Bakrie family exchanged 29% of their company, PT Bumi Resources, for a 29.9% stake in Bumi PLC. Bumi Resources owned majority stakes in 2 large coal-mining companies, 2 coal mining exploration companies and 87% of BRM, a non-coal mining company. All are incorporated in Indonesia. And Bumi PLC bought 85% of Berau Coal from another Indonesian industrialist for $1.6 billion.  

Rothschild and the Bakries were each left with 29.9% of Bumi PLC. Rothschild and Nirwan Bakrie became Co-Chairmen of the PLC. The happy marriage did not last long. The price of coal slumped, Bumi PLC lost $319 million in 2011 and the shares, which had been listed at 1,000p, fell to 254p when they were suspended 24 April 2013. By then Rothschild had accused the Bakries of irregular payments and loans at Bumi Resources, and further financial irregularities at Berau Coal. Both Rothschild and Bakrie resigned. The irregularities are said to total the suspiciously rounded figure of $1 billion. This suggests they are large but presently unquantifiable. 

The Australian (13 March 2013) reported that the Bakries' Bumi Resources, 29% owned by Bumi PLC, had sold down its stake in BRM, the non-coal miner, from 87% to 45%. If true, this would be a pre-emptive advance on a divorce settlement. 

The Bakries want to cancel their participation in Bumi PLC in exchange for recovering their shares in Bumi Resources plus a payment of $278 million. Bumi PLC would then be left with an 85% share in the loss-making coal miner, Berau Coal. The Bakries are the most powerful business family in Indonesia and one of their members, Aburizal Bakrie, has declared his candidacy for next year's Presidential election. This February the Bakries emerged as the victors of a proxy fight with Rothschild. Shareholders supported their candidates for the Board, including the Bakrie ally Mr Samin Tan as chairman. Bumi PLC owns nothing outside Indonesia. 

On 9 May 2013, Bloomberg reported that Nat Rothschild said his tie-up with the Bakrie brothers to form Bumi was a “terrible mistake". He regretted taking advice from Ian Hannam, the former JP Morgan investment banker, in the lead-up to the creation of Bumi.

"He said it was the best deal he had ever seen in his life,” said Rothschild. Nothing like blaming someone else for your mistake. With the shares suspended, the UK shareholders in Bumi PLC face a disappointing outcome. 

 What went wrong?

Nat Rothschild, who has specialised in resource-based assets, saw an opportunity. China was buying vast quantities of coal, Indonesia has vast quantities of coal and he wanted part of the action. But to do so he required a well-connected Indonesian partner already in the coal business and the Bakries seemed to be the perfect in-laws. The Bakries wanted to expand their interest in coal. They had tried and failed to buy Indonesia's third largest coal miner, Berau Coal. And Rothschild, with $1.1 billion in the bank, was a very well endowed bride.   

The price of coal then collapsed, falling 32% between January 2011 and December 2012. Bumi PLC made big losses and its shares collapsed in value (graph from Yahoo, Bumi PLC in blue, the FTSE 100 in green, click to enlarge):

 

The Bakries want a quickie divorce, leaving the other shareholders with the loss-making Berau Coal.

The Indonesian ways of doing business, governance and business ethics do not coincide with the UK's. Bumi PLC has only a minority stake in Bumi Resources, and Bumi Resources does not own 100% of most of its subsidiaries. This gives the companies' managers leeway to make deals that are in the interests of the controlling shareholder.

With all Bumi's assets in Indonesia, it was inevitable that the Indonesian Bakries would take effective control of Bumi PLC if they so wished. 

From both Bumi and TNK-BP (see 8 May article), the investor can draw some conclusions: 

1. Where assets are held in a joint venture in emerging markets (EMs), the local partner wields control.

2. London listed companies that operate only in EMs are not going to behave like companies whose management and main assets are in developed markets. Many EM companies have listed in London in the last decade, and many a UK investor has lost money in them.

3. EMs and resource companies are a toxic mix for the UK investor. Expectations are pumped up by City investment bankers and brokers, who are eager to win big fees. The hype - emerging market, China's demand for energy, the rising price of coal - is passed on by journalists, who are caught up in the unwarranted enthusiasm. But the people and government of the EM country naturally believe the resources that are dug up or pumped out of their ground belong to them. The risk of losing money in these companies is very high.

---------------------------------------------------------------------------------------------------------------------

Vodafone PLC

Evolution of the mobile phone, courtesy Wikipedia

When management report the results and performance of their company based on EBITDA (earnings before interest, tax, depreciation and amortization), you know they are hiding something. In the case of Vodafone, they hide the annual multi-billion pound impairments for assets they bought at vastly inflated prices. In just the last 4 years, Vodafone has written down its assets by 18.2 billion pounds in addition to over 30 billion in depreciation. After tax profits, for those same years, amount to 26.7 billion pounds. And 18.9 billion of that is not even managed by Vodafone - it comes from the company's associates, principally from its 45% share of Verizon Wireless.

Verizon Wireless is Vodafone's one outstanding success as an investor. In 1999, Vodafone reached an agreement with Bell Atlantic (now Verizon Communication) to establish a joint wireless business to serve the United States. Wireless is now the biggest mobile phone operator in America. Verizon holds 55% and Vodafone 45% of Wireless's equity. Management control is firmly in the hands of Verizon.

The marriage, despite its commercial success, has not been an easy one. Just a year into the marriage and it was rumoured that Vodafone wanted to buy out Verizon's share in Wireless. That same year, Wireless announced it would use a technology that would not be compatible with Vodafone's, though the pair made up the squabble. In 2004, Vodafone said that as both partners wanted all of Wireless, they were at an impasse. In 2005 Verizon retaliated by blocking dividend payments from Wireless, believing that this would force Vodafone into a divorce. This unhappy state of affairs lasted for 6 years. In 2012, Verizon needed Wireless's dividend as much as Vodafone and the cash began to flow. But Verizon still wants to divorce Vodafone. It is dangling $100 billion under Vodafone's nose. The shares have jumped:

Graph courtesy of Yahoo, click to enlarge.

What would Vodafone be worth without its share in Wireless?

Making sense of Vodafone's profitability is a Herculean task. Working through the thicket of accounting adjustments, I have made some heroic assumptions about the notional profitability of Vodafone without Wireless. The following excludes impairment charges, profit and loss on the sale of assets and foreign exchange translation gains and losses. To remove legacy items, I have used actual capital expenditure to replace the significantly higher depreciation and amortization charges each year.

Vodafone adjusted profit ex Wireless 2012 2011 2010 2009   4 YEARS EBITDA 14474 14670 14735 14490 58369 Less Capex 7852 8640 6975 6968 30435 less interest 1932 429 1512 2419 6292 NOTIONAL PROFIT PRETAX 4690 5601 6248 5103 21642 Tax at 24% 1126 1344 1500 1225 5194 NOTIONAL PAT 3564 4257 4748 3878 16448     Notional Earnings per share 7.3p 8.7p 9.7p 7.9p 8.4p

Wireless is carried at 35 billion pounds in Vodafone's balance sheet and the notional return on equity, once Wireless is removed, is 10%. Net debt is a manageable 27 billion pounds, or 35% of equity.

70% of Vodafone's revenue is from Europe and revenues are stagnating. The only market that is currently growing is India, which accounts for less than 10% of revenue. Although earnings are static these last 4 years, it is reasonable to assume that earnings could grow at about the rate of inflation, say 3% annually. I have used a discount rate of 10.8%. On this basis, my valuation model values Vodafone without Wireless at 67p a share. At this price, Vodafone would be on a notional PE of 8 and yield 6.2%.

$100 billion net proceeds for the sale of Wireless translate to 133p a share, giving a combined value of 200p. This compares to Vodafone's current share price of 191p.

There are significant uncertainties:

1. The potential tax bill on the sale of Vodafone's share in Wireless is variously estimated at 30 billion pounds (Societé General) to $5 billion (Citibank), were Verizon to pay $100 billion for the shares of Wireless.

2. Vodafone has a history of spending huge sums on assets and then writing them down. What is to stop Vodafone's management from throwing away a sizeable part of the proceeds from a Wireless sale on overpriced assets? This would greatly reduce the value of the Wireless sale to Vodafone's shareholders.

3. Vodafone and Wireless combine their purchasing power to reduce costs. The impact of a break-up on Vodafone's cost structure is not known.

4. Vodafone is in dispute with the Indian tax authorities that could cost it, including interest and fines, up to 2.4 billion pounds.

5. Vodafone's share price jumped 24% from a 12-month low of 154p in December to 191p on speculation of a sale of Wireless. If the sale does not proceed, the share price could fall steeply.

 

 

Marriage and Divorce Corporate Style (Part 1)

And BP PLC

The Betrothal of Reymont and Melusina, 15th century, courtesy Wikipedia

International corporate marriages can flourish and last forever - provided, it seems, that they are between the English and the Dutch. Royal Dutch Shell, Unilever, Reckitt Benckiser and Reed Elsevier are but the more notably successful Anglo-Dutch alliances. The most disastrous marriage for a British company was Dunlop's flirtation with Pirelli. They married in 1971 and divorced in 1981, leaving Dunlop in such a precarious situation that it fell into the arms of the asset stripper, BTR, 4 years later.

IAG (International Airlines Group), formed by the British and Spanish flag carriers in 2011, is the latest betrothal. BA was burdened by an enormous pension fund deficit, Iberia by its overpaid and overstaffed structure and both were fearful of low cost competition in their European heartland, where they were losing market share. And each was smaller than their major European competitors, Lufthansa and Air France-KLM. The shotgun nature of the wedding does not bode well.

True corporate marriages, where each party agree a split of shares and functions, are rare. Joint ventures that outgrow both parents, leaving a de facto marriage where none was intended, are rare too. So it is unusual for three large companies quoted on the London Stock Exchange to be simultaneously at odds with their marriage partners. But such is the case with BP, Bumi and Vodafone.

BP

In 2003, BP set up a joint venture, 50-50, with three Russian companies (forming AAR) owned by 4 billionaire oligarchs  to create TNK-BP. BP agreed to help the Russians create an oil major. Both sides pooled their oil and gas businesses in Russia and the Ukraine. The marriage seemed to be going swimmingly. BP received $19 billion in dividends from 2003 to 2011, a wonderful return on the $8 billion it had valued as its contribution to the joint venture. 

By 2011, TNK-BP accounted for 27% of BP's reserves, 29% of its production and 25%, or $4.2 billion, of its net profit attributable to BP shareholders. Tensions between the partners began early in the marriage and finally came to a head when AAR scuppered (via the English courts) a deal between BP and Rosneft, a big Russian oil company, to explore the Arctic without TNK-BP. BP needed cash to pay the costs arising from the Deepwater Horizon disaster, and it divorced AAR, selling its 50% share in TNK-BP to Rosneft. BP received $11.7 billion in cash and an 18.5% holding in Rosneft that BP values at $21 billion. The operation was completed in March 2013. 

The divorce left BP's Russian strategy in tatters. ExxonMobil stepped in to get the Kara Sea (Arctic) and Baltic Sea exploration rights with Rosneft. And BP is left with a minority stake of 19.75% in a company which is 69.5% owned by the Russian government.  The loss of TNK-BP may, in the long run, prove to be more costly to BP than the Deepwater Horizon disaster. 

How did such a promising and successful venture come to such a sudden end? BP realised that, given the political situation in Russia, success in developing Russian oil and gas depended on finding Russian partners. The Russian partners, AAR, needed the technical expertise, management and access to international finance of BP to achieve their goal of becoming an oil major. But AAR expected more than BP was willing to provide. While AAR wanted to create a worldwide oil company, BP was interested in keeping TNK-BP within the confines of the old Soviet Union. Further, in 2007, BP began negotiations with Gazprom, a large Russian gas company, to take over AAR's stake in TNK-BP. BP saw Gazprom as a stronger partner than AAR. As AAR did not want to sell, this did not prosper, but it did nothing for matrimonial harmony. 

AAR exerted pressure on BP by way of its excellent relations with the Russian government. BP staff working for TNK-BP suddenly could not get visas. Police raided TNK-BP offices run by BP staff. Mr Robert Dudley, the American CEO of TNK-BP, was placed under such pressure that, in 2008, he fled Russia in fear of his life. He was replaced first by one of the AAR consortium and then by Maxim Barsky, a young and relatively inexperienced oilman, who was the candidate chosen by AAR. BP had lost control of TNK-BP. 

In 2010, BP, under its new CEO, the same Mr Dudley, decided to circumvent its partner AAR and explore the Arctic waters for oil with Rosneft, a Russian competitor to TNK-BP. Rosfneft is a favourite with the Kremlin leadership, and a most attractive partner. But this contravened the shareholder agreement with AAR, and the Rosneft deal was declared unlawful by an English court. BP had cheated on AAR, was found out and divorced AAR to marry Rosneft. 

The value of a company includes the quality of its management. Company reports and press releases are often illuminating in this respect. If the company is large or newsworthy, articles on or by managers are to be found in the press and online. BP had a poor safety record long before Deepwater Horizon. Poor management in one area often spills over into poor management in another. Consider the managerial blundering of TNK-BP by BP: 

1. At the outset, BP had 5 directors on the board of TNK-BP. AAR had 4. The CEO, it was agreed, would be appointed by BP. At the end, each partner had 5 board directors with 3 independents. 2 of the independents were employed by Russian concerns. BP lost control of TNK-BP to AAR, who installed its candidate as CEO. 

2. If a partnership is to succeed, you don't go looking for other people to replace your partner. Which is what BP did with Gazprom in 2007. It doesn't take much imagination to understand how this flirtation offended AAR. 

3. BP negotiated the joint exploration of the Arctic sea with Rosneft in 2010, when its shareholder agreement with AAR did not permit such alliances outside TNK-BP. Not only did BP lose the contract to ExxonMobil, but it also declared war on its partners in TKN-BP. A war it could not possibly win. 

4. With the sale of TNK-BP, BP lost 27% of its reserves, 29% of its production and 25% of its net profit attributable to BP shareholders.  

This is not the end of the story for the minority shareholders who invested in the publicly quoted TNK-BP on the Russian stock market. After buying out the majority shareholders, Rosneft variously announced that TNK-BP minority shareholders were the responsibility of BP, that TNK-BP would take out a large loan, presumably to finance Rosneft, and finally that TNK-BP would pay a dividend, but much less than in prior years. TNK-BP shares have slumped by 55% from their 2012 peak:

 

Graph courtesy of the Financial Times, price in Roubles, click to enlarge. 

BP is a minority shareholder in Rosneft. Will BP get better treatment?  

Note: I will be returning to Bumi and Vodafone next week.

---------------------------------------------------------------------------------------------------------

What is BP PLC worth?

Deepwater Horizon drilling platform courtesy Wikipedia 

3 years on from the 2010 Deepwater Horizon disaster, BP is a shrunken yet financially strong oil major. The company has raised $50 billion, including the cash proceeds of its sale in TNK-BP, towards its $41 billion provision for compensation, damages and fines arising from the largest oil spill in US history. It is shrunken because: 

1. Oil and gas production is down 42% from 4 million barrels of oil equivalent (BOE) in 2009 to 2.3 million in 2012, once BP's share in TNK-BP is excluded. 

2. Proven reserves of oil and gas are down 44% from 18.3 billion BOE in 2009 to 10.3 billion today. 

3. BP's market cap has fallen 27% from 122 billion pounds before the oil spill to 90 billion now. 

4. Earnings per share has declined 53% from 88 cents in 2009 to an adjusted 41 cents in 2012 (see text below). 

But BP is financially strong. At March 2013 BP had a cash reserve of almost $30 billion and a net debt to equity ratio of only 13%. Moody gives BP an A2 rating even after discounting an increase to $60 billion for the total cost of the Deepwater Horizon disaster.  

Compared to its great rival, Shell, BP shares have underperformed by 35%:

Graph courtesy of Yahoo, click to enlarge. 

Is BP worth buying at 473p? 

If we can take as a base of BP's ongoing business its 2012 results, adjusted for the sale of TNK-BP and 2 other items, then its base earnings per share is 41 cents. This adjusts 2012 profits of $11.6 billion for: the $3.7 billion net contribution of TNK-BP to profit after tax; the $6.7 billion pre-tax gain on the sale of assets to meet its Deepwater Horizon liabilities; and adds back the $5 billion pre-tax provision for Deepwater Horizon liabilities. On this basis, BP shares are currently on a PE ratio of 18 and they yield 4.4%. Compared to Royal Dutch Shell shares, which are on a PE of 8 and yield 4.8%, this is expensive. 

There are further considerations: 

1. If the final cost of the Deepwater Horizon disaster is $60 billion, as Moodys expects, then BP will no longer be in the very strong financial position it is in at the moment. But the company has the resources to make the additional $19 billion payout, which it has not provided for in its accounts, without having to sell off any more of its assets. 

2. No value has been placed on BP's almost 20% share in Rosneft. It must be worth something, but given the experience of foreign companies operating in Russia, it would be foolish to assign a value to a minority holding in a company owned by the Russian state. 

3.  BP has invested $7.6 billion in wind farms and biofuels with no return to date. Indeed the 2012 accounts include an impairment charge of $318-million for this business and the company does not give any figures for its operating results on the grounds that they are not material. It would seem we are observing another case of BP mismanagement.  

4. BP and Shell face a growing liability for their defined benefit pension plans. In 2012 BP booked an additional $1.5 billion charge directly to its balance sheet for the liability. This did not pass through the profit and loss account. Pension liabilities will continue to grow. 

5. Taking the rough measure of their respective oil reserves and production, BP is undervalued compared to Shell: Royal Dutch Shell's market capitalization is 53% more than BP's, but its oil and gas production is 43% higher and its oil and gas reserves are but 32% higher than BP's. 

While it is impossible to give a valuation for BP, given the uncertainty still hanging over its business, its shares look expensive when compared to Shell. And Shell has the better management. See http://thejoyfulinvestor.blogspot.co.uk/2013_02_03_archive.html

 

 

 

 

 

 

 

Hedge Funds and How Fund Managers Think

And Sage PLC

The Worship of Mammon by Evelyn de Morgan, courtesy Wikipedia

The hedge fund is the most lucrative new product invented by the financial community since the Assyrians and Babylonians founded the business of banking 3,000 years ago. The promise to make money every year regardless of the business cycle has lured investors big-time. Today, hedge funds manage $2.4 trillion. Along with the big promise go big commissions - a 2% annual charge on assets plus 20% of any profit over a defined benchmark is the standard. And secrecy. Hedge funds keep the detail of what they do secret, on the grounds that to inform the public would give an advantage to their competitors. And other than their investors, no one has access to their investment performance. Managers do trumpet the dollar value of their hedge funds, for it is volume where they make their money.

According to Simon Slack (The Hedge Fund Mirage, 2011), between 1998 and 2010 hedge fund managers made $9 billion for investors and took $441 billion in fees for themselves. One hedge fund manager, John Paulson, earned $4.9 billion in 2011. Between 2003 and 2012, the S&P 500 outperformed hedge funds every year except for 2008 when both fell sharply. Hedge funds have not even kept pace with inflation (The Economist 22 December 2012). 800 hedge funds in the UK manage 80% of the hedge fund business in Europe. The disconnect between what hedge fund managers earn and what they achieve is, unfortunately, not unusual in the fund management business.

Seth Klarman (Margin of Safety, 1991), manager of Baupost, the 4th biggest US hedge fund, wrote of fund managers in general:

   "Most money managers are compensated, not according to the results they achieve, but as a percentage of the total assets under management. The incentive is to expand managed assets in order to generate more fees. Yet while a money management business typically becomes more profitable as assets under management increase, good investment performance becomes increasingly difficult. The conflict between the best interests of the money manager and that of the client is typically resolved in the manager's favor." 

Mr Klarman's own hedge fund, Baupost, started off with $30 million in 1982 and now manages $23 billion. According to press reports and Mr Karman's letters to investors that have made their way to the internet, Baupost has underperformed the S&P 500 in 1990-2000 and 2009-12. In 2008 his fund lost 12% compared to the 37% loss in the S&P 500. I cannot find Baupost performance figures for the period between 2001 and 2007. One reason for the underperformance must be his large holdings of cash, which sometimes reaches 50% of the fund. I say 'must be' as no detail of Baupost results is available. 

The lesson for the individual investor is to take care with any offering from the City on the assumption that it will be loaded in favour of the vendor and not the investor: the candid Mr Klarman explains (we can substitute 'the City' for 'Wall Street'): 

1. "Wall Street is in many ways just a gigantic casino. The recipient of up-front fees on every transaction, Wall Street clearly is more concerned with the volume of economic activity than its economic utility".

2. Beware of Initial Public Offerings (IPO). "A significant conflict of interest also arises in securities underwriting. This function involves raising money for corporate clients by selling newly issued securities to customers. Needless to say, large fees may motivate a firm to underwrite either over-priced or highly risky securities and to favor the limited number of underwriting clients over the many small buyers of those securities." The Facebook IPO, where the stock fell 32% in a matter of weeks, is but the latest example.

3. Beware of new investment trusts. "Sometimes the lust for underwriting fees drives Wall Street to create underwriting clients for the sole purpose of having securities to sell. Most [investment trusts], for example, are formed exclusively to generate commissions for stockbrokers and fees for investment managers. . . 8% commission is paid to the underwriter, leaving 92% to invest. Within months of issuance, [investment trusts] typically decline in price below the initial per share net assets value. This means that the purchasers . . . on the IPO frequently incur a loss of 10 to 15 percent of their investment."

4. Fund managers' interests do not coincide with investors. "A great many of those who work on Wall Street view the good will or financial success of clients as a secondary consideration; short-term maximization of their own income is the primary goal." Their business is to maximise fees and commissions.

5. Beware of broker recommendations. "Investors must never forget that Wall Street has a strong bullish bias, which coincides with its self-interest . .  there is more brokerage business to be done by issuing an optimistic research report than by writing a pessimistic one. . .  In addition, analysts are unlikely to issue sell recommendations due to an understandable reluctance to say negative things, however truthful they may be, about the companies they follow." This is especially the case when the broker also works for the company. Also, in order to generate commissions, brokers will advise selling one stock to buy another (a practice known as 'churning').

6. Beware of new types of securities. "Investment bankers . . . are constantly creating new types of securities to offer to customers. Occasionally such offerings both solve the financial problems of issuers and meet the needs of investors. In most cases, however, they address only the needs of Wall Street, that is, the generation of fees and commissions." Klarman notes that the early success of an innovation is not a reliable indicator of its merit. "It takes longer for problems to surface." Think CDOs (collaterised debt obligations) and, in the retail banking sector, PPI. The current rage for structured products is another examples of a security that may well go wrong. Of course Klarman, writing in 1991, does not mention hedge funds, but they should surely be included as the biggest self-serving creation of Wall Street and the City to date.

However, Fund managers are as an essential part of an individual's investment process as the stock market. They have introduced low cost trackers and exchange traded funds. UK investors have access to all the markets in the world thanks to fund managers. And, of course, they are essential for savers who do not have the time or interest to select their own investments. But it helps to understand how they think.

------------------------------------------------------------------------------------------------------------------

Sage PLC

Clay accounting tokens from Susa, Mesopotamia 3500 BC courtesy of Wikipedia

Sage has established a large, profitable, cash generating business providing accounting software and services to small and medium sized businesses primarily in North America and Europe. 69% of its revenue is derived from subscriptions, up from 61% in 2008, and they provide a regular income stream. The remaining revenue comes from the sale of software licenses.

The company has a market cap of 3.9 billion pounds and it is a component of the FTSE 100. In the past 5 years, Sage shares (blue) have comfortably outperformed the FTSE 100 (green):

Graph courtesy of Yahoo, click to enlarge

Sage's finances are in excellent health: 

1. Earnings per share have increased at an annual rate of 12% between 2001-3 and 2010-12, slowing to 9% in the last 6 years, and the net operating margin is a substantial 25% 

2.  Operating cash flow of 1.5 billion pounds in the past 5 years has comfortably covered the 0.7 billion capital expenditure requirements and the dividend. The surplus has enabled Sage to acquire businesses. 

3. Net debt is down from 497 million pounds in 2007 to 186 million now. Net debt to equity has declined from 47% to 13% in this same period. 

4. Neither derivative exposure nor pension liabilities (the only defined benefit pension scheme is in Switzerland) are significant balance sheet items. 

5. Return on equity is 13% on both capital and retained earnings. 

29% of Sage's revenues come from North America, 20% from France, 19% from the UK and Ireland, and it has substantial businesses in Spain, South Africa, Germany and Australia. Revenue growth has declined and 2012 earnings per share were down 2% on 2011. The company has the objective of reaching 6% organic revenue growth by 2015 by implementing a new plan: 

1. Sage is focussing the business on its bookkeeping and business management software and it is exiting other businesses that account for 10% of revenue. It has entered the Brazilian market by purchasing a local business. 

2. Sage is diversifying its technical offer by increasing its online bookkeeping service to small businesses (5 to 25 employees), launching in 2013 a hybrid cloud service for small to medium businesses and integrating its payment services with its accounting software. The company has employed a new Marketing Director, who formerly worked at Cisco. 

3. The company is concentrating on the subscription business, which is much less volatile than license sales. 

Other than the new Marketing Director, Sage's senior management have all been with the company for several years or longer. One director has sold 450,000 shares at 310p in January 2013. There are no other significant sales or purchases in the last year. 

At the present price of 341p, Sage shares are on a PE of 22 and yield 2.9%.  

Using a discount rate of 10.5% (Sage pays 4.5% on its loans), my valuation model values Sage shares at 270p. This is the average of discounting earnings (331p), return on equity (235p) and equity per share (243p) projections for 2013-17. 

The current share price of 341p is 26% above the 270p price of my valuation model. 

Cautious investors will note: 

1. Sage's share price has jumped from a low of 245p in May 2012 to a 12-month high of 356p in March 2013. And it is not far off that high now. 

2. Sage is stuck in low growth markets with little exposure to Asia or other emerging markets. 

3. Sage's future growth is predicated on its new plan. Plans are full of promise when they are born, but like children they can disappoint when they get older.