Deutsche Bank downgrades Sage, sees slowdown in recurring revenue growth

Deutsche Bank downgraded its stance on shares of software group Sage to 'sell' from 'hold' on Friday as it pointed to a slowdown in recurring revenue growth.

"Sage has made good progress in transitioning to a subscription revenue model. However, we foresee recurring revenue growth slowing from here as some of the initial boost factors from a subscription transition fade," the bank said.

It said Sage is now entering a new phase, where the quick wins from low-hanging fruit are fading and the company needs to focus on organic product development to sustain growth in the future.

"In our view, this will unavoidably result in a sustained rise in Sage's historically low level of research & development investment and operating margin pressure," it said.

As a result, Sage's earnings per share and free cash flow growth is unlikely to exceed low-to mid-single-digit % organically over the medium term, which is well below the software peer group average, DB added.

"Given SGE's historically somewhat indifferent execution around product development, investors are unlikely to automatically assume that there will be a payback that sufficiently compensates for this relatively meagre outlook."

The bank lifted its price target on the stock to 650p from 505p.

At 1015 BST, the shares were down 1.2% at 746p.