UBS downgrades Sage as risk-reward unfavourable
UBS downgraded software group Sage to 'sell' from 'neutral' on Friday, cutting the price target to 520p from 590p as it said the risk-reward was unfavourable and strategic questions remain.
The bank noted that shares are up 17% from their fourth-quarter lows, and while many others in the sector have seen a similar recovery, none has seen a double-digit EPS downgrade since 1 October.
"While management uncertainty is now addressed, neither the new CEO nor CFO brings the "cloud-native experience' sought at the time of Stephen Kelly's departure," UBS said, adding that the company's £40m 'one-off' step-up in R&D investments announced with the FY18 results was likely to be more permanent in nature.
It said that competitive pressures remain. "As Sage Accounting slows we think Sage is storing up trouble in terms of future new customer acquisition as the entry-level historically has been the source of many mid-market migrations," it said.
The bank also argued that Sage's £250m R&D budget still pales in comparison with US rival Intuit's $1.2bn spend.
As far as the company's first-quarter update next week is concerned, UBS pointed out that Sage faces "relatively easy" comparatives for recurring revenues, with growth of 7% in the first quarter of 2018 and 5.8% in the second quarter, versus the fourth quarter's run rate of 7.2%.
At 1530 GMT, the shares were down 1.9% to 609.40p.