Canaccord Genuity downgrades Sage to 'sell'

Canaccord Genuity believes the "hyperbolic" share price reaction to an essentially in-line set of results for 2023 and FY24 guidance that came in as expected had presented investors with a chance to take some gains. Canaccord pointed out back in the summer that Sage had been one of the best-performing UK Technology stocks year-to-date, principally due to organic recurring revenue growth accelerating to low-teens percentage point which, in combination with margin expansion, drove an approximately 13% upgrade to consensus earnings per share.

However, Canaccord said from here the risk of organic recurring revenue growth muting to high-single-digits was rising, in its view, which in turn could drive a de-rating of the shares.

"If we isolate quarterly organic recurring revenue growth, we estimate this already slowed to ~9% yoy in the final quarter of the year after clocking in at 11-13% in the prior four quarters," said the Canadian bank. "Looking ahead - to maintain 10+% ARR growth Sage will need to continue to execute flawlessly on its mid-market platform Intacct, which has delivered 30% US ARR growth in the last two years, contributing circa 1/3 to Sage's total ARR growth."

The Canadian bank highlighted that while secular drivers remain, Intacct was playing in a "competitive space" and there was a growing macro risk in the US from the "higher for longer" interest rate environment.

"Overall, we view a slowdown in recurring revenue growth from low-teens to high-single-digit % over the next 12 months as a tangible risk. This seems at odds with the recent re-rating of the shares and now full valuation on our raised forecasts," concluded the analysts, who kept their 970.0p target price on the stock unchanged.

Reporting by Iain Gilbert at Sharecast.com