Deutsche Bank raised its rating on Sage to ‘hold’ from ‘sell’ and maintained its target price at 540p.
“In the past 2 months Sage has fallen by 16% and now trades at 16x our FY19 earnings per share, which is the low end of its 5 year valuation range,” the bank said.
“While competition is rising, we believe Sage has a relatively sticky, defensible product set and forecast mid-single % eps CAGR over the next 3 years, along with a 3% yield.
“We continue to think ~16x FY19 eps is reasonable, which yields our TP of 540p, only slightly below the current price, hence the upgrade.”
Shares have fallen since Sage announced the departure of its chief executive Stephen Kelly in August.
Private equity funds could be looking at Sage, says Deutsche Bank
Deutsche Bank believes private equity funds could be exploring an acquisition of Sage, given that US firm KKR & Co has launched a A$1.75bn takeover offer for MYOB Group after buying almost a fifth of the Australian accounting software provider.
The bank said it struggles to see obvious value for a private equity firm to buy Sage.
“Sage's strategy under Stephen Kelly has been two pronged - firstly to maintain the 'cash cow' on premise product set and within this to reverse engineer these products into 'cloud lite' versions (eg Sage 200c), encouraging customers to move from maintenance to subscription versions.
“Secondly, Sage invested in organically developed cloud products (Sage One, Sage Live) which had limited success and were augmented with acquired assets (Sage People, Intacct).”
Deutsche Bank added that Sage could “plausibly be attractive for a private equity buyer or activist” so is wary of keeping its ‘sell’ recommendation.
If a private equity owner took Sage private, the bank thinks there would be “more of the same with greater focus”, heavy investment in the rapidly growing cloud segment, the sale of mature assets the disposal of the Intacct financial management and services business.
“So in conclusion, we can see a realistic asset sweating style scenario that might work for a private equity buyer but we do not see this as a 'slam dunk' investment given the uncertainty and leverage required.”
Shares rose 2.4% to 560p in late morning trading.