BofA Merrill Lynch lifts Sage on long-term growth

Software supplier Sage got a boost after Bank of America Merrill Lynch upgraded the stock to ‘buy’ from ‘underperform’ and lifted the price target to 660p from 400p.

“We think CEO Kelly is building a better business than he inherited – through investment in product and go to market – and Sage will deliver high single digit growth, margin gains and accretive M&A to drive strong shareholder returns.”

The bank changed its historically bearish view on the stock for a number of reasons.

He said Kelly’s team has recognised and begun to address several issues such as the lack of investment in public cloud and a fragmented organisational structure.

In addition, Merrill said pure-play cloud vendors such as Xero have failed to gain significant market share and meet growth expectations

The bank also pointed to a £16bn green-field opportunity in cloud.

“Instead of displacing existing solutions, public cloud products are beginning to open up an opportunity to sell software to sole traders, micro businesses etc. which had previously used paper and/or Excel.”

The bank recommended a long Sage, short Micro Focus pair trade to take advantage of the similar underlying valuation and superior long-term growth expectations for buy-rated Sage.

At 1400 GMT, Sage shares were up 2.4% to 591.50p.