Broker tips: Royal Mail, Sage
Analysts at HSBC downgraded Royal Mail to 'hold' and cut their price target on the firm by almost a third on Friday, noting that its 2020 earnings before interest and taxes were likely to be lower than last year as positive earnings momentum was "some way off".
HSBC said Royal Mail's five-year strategy revealed in late May was "a credible plan" but warned that it would likely take "time to deliver" management's long-awaited remedy for the progressive deterioration in the group's profit outlook.
However, after an extensive review and with a refreshed board, HSBC felt Royal Mail had finally been put in a position to respond.
"The plan to increase automation and re-orientate the business towards parcels is credible and necessary, but based on our forecasts the benefits are clearly back end loaded," said HSBC.
HSBC, which lowered its price target on the firm to 216p from its previous 300p standing, also expected earnings per share to be lower in 2019 than they had been a year earlier and saw "little likelihood of an increase" in Royal Mail's dividend of 15p "for some years".
Clearly, the British bank was giving Royal Mail "no benefit of the doubt" just yet, its analysts noted that if management achieved their revenue and margin targets, then by 2024 the group's operating profit after transformation costs would be in the region of £620m.
"In other words, it will take six years for profits to exceed where they were in 2018," said the analysts.
"On this basis, we downgrade our rating to 'hold' from 'buy' as we see few incentives for marginal buyers to become involved at present."
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.