Barclays downgrades Sage amid increasing uncertainty

Barclays downgraded Sage to 'underweight' from 'equalweight' on Tuesday and cut the price target to 495p from 675p, citing increasing uncertainty, as it took a look at the broader European software and IT services sector.

The bank said that while Sage's valuation remains undemanding on current estimates, the lack of a chief executive at such a crucial stage in the company's attempted transition leaves "considerable" downside risk.

"We see a lack of marginal buyers of the stock until such time that a new CEO is in place and his or her strategy revealed. Stephen Kelly took the view that the prior strategy was sound, but that the pace of execution needed to be stepped up. Management attrition under him has been very high and it is now clear that an alternative approach is required.

"We think this could likely involve a margin reset to invest organically in an acceleration of a cloud architecture transition (and/or further expensive M&A), and we nudge down our FY20 margin to 24%, leaving us over 10% below consensus earnings per share in this year."

Sage is due to report its FY18 results next month. Barclays said it expects organic revenue growth for the year of 6.7%, slightly below guidance and equating to organic growth for the second half of 7%. The bank expects operating profit for the second half of £291.6m, equating to a margin of 30.2%, in line with guidance.

At 1050 BST, the shares were down 2.7% to 540p.