Broker tips: Sage, B&M, Darktrace

JP Morgan has placed Sage on its "positive catalyst watch" ahead of the accounting software group's fourth-quarter results in November, where it expects to see solid growth with its cloud finance offering Intacct.

The bank reiterated its 'overweight' rating on the stock with a 1,100p target price.

Analyst Toby Ogg highlighted Intacct is Sage's most important product and growth engine, which accounts for around 15% of sales (expected to grow to 30%), and contributed 4.5 percentage points to organic growth in the past financial year.

"Based on our analysis and industry discussions, we believe Intacct is a leading asset in the mid-market core financial management software space and is poised to continue taking share as its addressable market goes through a generational shift to the cloud," Ogg said.

Ogg believes Sage Intacct will drive consensus forecast for Sage higher through its North American exposure and international roll-out over time.

"Sage is a key conviction in European Software with an under-appreciated 10%+ revenue growth profile, mid-term margin potential of ~25%, mid-teens sustainable EPS growth, balance sheet optionality, attractive valuation (~5% clean ‘25 FCF yield vs key peer Intuit ~3%) and runway of incremental buyers."

Ogg said to expect "robust guidance" when Sage gives its fourth-quarter update on 22 November.

Shore Capital upgraded B&M European Value Retail on Wednesday to ‘buy’ from ‘hold’ and lifted the fair value to 640p from 560p on news that the discount retailer will buy up to 51 Wilko stores for £13m.

It said the acquisition is expected to enhance B&M’s presence and growth potential.

"While the exact details about the acquired stores and the integration process remain to be clarified at the interim results in November 2023, we expect that B&M's acquisition of these stores could provide a significant boost to the company's growth," the broker said.

"This acquisition aligns with B&M's plans for expansion, as we anticipated that the stores will be rebranded under the B&M fascia. The move should accelerate the store rollout in an accretive way, and the ultimate ambition of 950 stores in the UK could be extended, in our view."

Shore said its conservative assumption is that around 10 Wilko stores will be converted to the B&M fascia per quarter, starting from FY24F Q4.

"Such a conversion strategy is expected to contribute to an upgraded top-line growth of 3% and 6% for FY25F and FY26F, respectively."

The broker said that based on its new estimates, B&M's shares are currently trading on an FY25F EV/EBITDA of 7x, which it considers "notably low, offering an attractive investment opportunity with a 15% discount to the UK retail sector".

Shares in Darktrace slipped on Wednesday morning after the cybersecurity firm cut its margin guidance for the current financial year owing to changes in its commission structure; but broker Berenberg said the overall impact would be muted as it maintained its 'buy' rating on the stock.

Berenberg said Darktrace's shares trade at an enterprise value-to-sales ratio of 4.1x, as it kept its 600p target price for the stock, which was down nearly 4% at 354.8p by 1107 BST.

Results for the year to June 2023 were bang in line with forecasts after a detailed pre-close trading update in July. However, the company said that, in order to be more competitive with peers in regards to talent, it has now decided to pay salespeople 100% of their commission upfront, compared with the earlier model of 50% upfront and 50% 12 months later.

"In moving to 100% paid upfront, Darktrace will now capitalise substantially all sales commissions and amortise this across the three years of the contract life," Berenberg explained in a research note. "The company notes that this will generally move more commission cost recognition to later periods, better aligning with revenue recognition but also inflating EBITDA margins."

As such, as it moves to changes its definition of adjusted EBITDA to treat amortisation as cash costs, EBITDA margins for the year to June 2024 will be in the range of 17-19%, down from earlier guidance of "around 22%".

The news, which was clearly taken poorly by the market on Wednesday, should have a limited impact on the long-term financial profile of the company, Berenberg said.