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UBS slashes target for Sage as it questions firm’s ability to innovate amid shift to cloud

The Swiss bank said in a note that investment at the FTSE 100 firm had " lagged competitors for many years", adding it expected continued elevated investment spends
Sage stand
UBS also cut its EPS estimates by 17% to 29.6p for the 2019 financial year

UBS has slashed its target price for Sage Group PLC (LON:SGE) to 590p from 700p as it questioned the firm’s ability to innovate amid its push to transfer to a cloud-based, software-as-a-service (SaaS) model.

The Swiss bank said while the FTSE 100 software firm had lifted its investment spend to £60mln this year, including a “sUBStantial” £40mln for research & development (R&D), the company’s investments “have lagged competitors for many years now, and we remain concerned about Sage's ability to innovate”.

READ: Sage shares fall as it warns margins investment in cloud transition will dent this year’s profits

“While "cloud-native" solutions reported 35% revenue growth in 2018 to reach £144mln (8% sales), most of the growth came from acquired rather than organically-developed solutions. With competitors still circling, while the strategy looks more plausible, risks remain” analysts said.

The bank added that while the £60mln investment was described as a one-off, they expected R&D spend to “stay elevated” going forward.

In its final results last week, Sage reported that as a result of the increased investment, margins for the current financial year were expected to fall to between 23-25% compared with 27.8% for the year just gone and 28% in fiscal 2017.

Lower growth and sluggish margins expected into new fiscal year

UBS also said that with management incentives focused on “recurring growth rather than total sales” as well as comments by the chief executive Steve Hare that "revenue growth may flatten. It may even dip slightly", lower growth and increased investments were “likely to remain a feature for some time”.

As a result of the new estimates, the bank’s earnings per share (EPS) estimates were cut by 17% to 29.6p for the 2019 financial year, and by 16% and 13% for 2020 and 2021 respectively.

Analysts also said that with the expected elevation in R&D they expected margins to recover only 30 basis points to 24.4% in 2020.

In mid-morning trading Monday, Sage shares were up 0.6% at 580p.

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