FTSE 100 constituent Sage (SGE) is just the sort of relatively safe, cash generative, dividend paying company we think investors will chase through an uncertain 2018.

Sage has become one of the UK’s leading software and enterprise tools suppliers. While it is best known for accounting services like payroll and tax processing, it can also bolt on extra functions like human resources and customer relationship management. That might sound dull but these are business critical applications.

That means the company’s typical smaller and medium-sized enterprise customers are sticky, making future revenues very predictable. The Sage model also throws off lots of cash, with surplus funds funnelled into growing dividends likely to yield a respectable 2.2% over the year.

For the year to 30 September 2017 Sage reported £1.31bn of recurring revenue, or 76% of its £1.72bn total.

Now at the end of a three year transition phase, designed to embrace cloud software functionality and bolster recurring revenues, Sage is ready to accelerate growth. The company is aiming for high single-digit organic revenue expansion after several years of low to mid-single digit rates.

Organic growth may be bolstered by bolt-on acquisitions, such as those of Fairsail, Compass and Intacct last year, which helped add clever technology and extend its global footprint.

Margin improvements should mean profit grows faster than revenue. Activities like selling surplus office space and streamlining sales and marketing teams have been done but much of the benefit has yet to shine through in reported figures.

Cross and upselling extra functionality is another avenue, one that should be helped by plans for a single business cloud platform.

The biggest challenge facing Sage is competition. QuickBooks-owner Intuit and MYOB are established while relative newcomers such as Xero and KashFlow are growing fast. Yet the global market is vast with plenty of opportunity to sell to businesses.

Sage’s shares had a decent run in 2017 but we believe there is more upside through 2018 as the market wakes up to the growth story gear change.

With more questions than answers facing investors as we enter 2018 we believe trusted company shares will earn premium valuations. A 25-times price-to-earnings multiple, assuming modest earnings outperformance, could imply a £10 share price before 2018 is over. (SF)

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