UBS downgrades Sage to 'sell'

UBS downgraded software firm Sage to ‘sell’ from ‘neutral’ on Tuesday and cut the price target to 720p from 745p as it argued that margin pressures were set to persist.

"While Sage enjoys a defensive topline profile entering FY23 we believe ongoing margin pressures were masked last year by bad debt provision reversals and the benefit of a major restructuring round," UBS said.

It also said that the recently-concluded acquisitions of Lockstep and Brightpearl enhance the offering but bring losses which will see a full-year impact in FY23.

"As Sage moves to emphasise underlying metrics over organic its management incentive programme also shifts, potentially implying more M&A given a margin underpin on average rate of return growth likely beneath current levels (FY 22: 16%)," the bank said.

UBS noted that consensus expectations are for sales to grow at an 8% organic compound annual growth rate through FY25 with margins reaching 21.5%, a 70 basis points a year improvement.

"Even absent future M&A we see this as challenging and are at 20.5%; 110bp below consensus," it said.

At 1555 GMT, the shares were down 2.4% at 752.80p.