Deutsche Bank ups Sage to 'hold' from 'sell'

Deutsche noted that the shares have fallen 16% over the past two months and now trade at 16x the bank's FY19 earnings per share estimates, which is the low end of its five-year valuation range.

"While competition is rising, we believe Sage has a relatively sticky, defensible product set and forecast mid-single percentage EPS compound annual growth rate over the next three years, along with a 3% yield.

"We continue to think circa 16x FY19 EPS is reasonable, which yields our target price of 540p, only slightly below the current price, hence the upgrade."

The bank also pointed to news this week of private equity firm KKR's $2.6bn takeover bid for Australian accounting software company MYOB. It said it was surprised that Sage shares did not react positively to news of private equity interest in the more mature players in the sector.

On Tuesday, Sage shares took a hit after Barclays cut the stock to 'underweight' from 'equalweight'. It said that while the valuation remains undemanding on current estimates, the lack of a chief executive at such a crucial stage in the company's attempted transition leaves "considerable" downside risk.

"We see a lack of marginal buyers of the stock until such time that a new CEO is in place and his or her strategy revealed. Stephen Kelly took the view that the prior strategy was sound, but that the pace of execution needed to be stepped up. Management attrition under him has been very high and it is now clear that an alternative approach is required.

"We think this could likely involve a margin reset to invest organically in an acceleration of a cloud architecture transition (and/or further expensive M&A), and we nudge down our FY20 margin to 24%, leaving us over 10% below consensus earnings per share in this year."

At 0930 BST, the shares were up 1.2% to 553.20p.