11th Jul 2016 10:46
LONDON (Alliance News) - Societe Generale maintains its sell rating for Sage Group, but raised its earnings per share estimates and target price for the stock on a boost from the weaker pound.
Whilst the vote to leave the European Union will likely hit demand for software companies, SocGen sees a benefit to Sage from the sharp drop in sterling against other major currencies.
Despite an expectation that overall IT spending growth will trend down in the coming months due to Brexit uncertainties, SocGen still assumes some growth, rather than contraction in global IT budgets.
"While SMEs and mid-market companies should be affected by Brexit, and bankruptcy rates are likely to increase, we believe that Sage's core products (eg accounting, payment solutions) belong to the must-have category and companies are unlikely to brutally slash these investments," SocGen said.
Sage's recurring revenue accounts for 69% of its group revenue, and grew 10% organically in its first half, a slightly faster pace that in previous periods. The company's efforts to transition its installed base to a subscription base has resulted in this segment being a key outperformer in the past two years.
SocGen also expects Sage's processing activity to be resilient, but sees more risk for its software and software-related services segment, which makes up 18% of group sales, due to market uncertainties that should see small and medium enterprises limiting their purchases.
For Sage's year to end-September, SocGen has revised up its earnings per share estimate by 4%, and increased its revenue forecasts by 2%.
SocGen upped its price target for Sage to 500 pence from 465 pence, but said it still steers clear of the stock, as it believes that the "ongoing transformation of its business model is likely to weigh on its profitability, and that its current valuation is relatively expensive when compared to European peers."
Shares in Sage were up 1.6% at 650.00 pence Monday.
By Hana Stewart-Smith; [email protected]; @HanaSSAllNews
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