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Sage Group shares dip as Deutsche Bank downgrades rating to 'sell'

Deutsche Bank thinks Sage’s earnings per share and free cash flow are unlikely to exceed low to mid-single digit growth over the medium term

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The German bank said Sage needs to focus on organic product development to sustain growth in the future

The Sage Group PLC (LON:SAGE) shares were under pressure on Friday after Deutsche Bank downgraded its rating on the stock to ‘sell’ from ‘hold’ and raised its price target to 650p from 505p.

Deutsche Bank said the UK software firm has made good progress in shifting its focus to subscription services by moving more products to the cloud.

READ: Sage leaves revenue guidance unchanged as SaaS growth offsets decline in legacy business

“However, we foresee recurring revenue growth slowing from here as some of the initial boost factors from a subscription transition fades,” the German investment bank said.

“We believe that Sage is now entering a new phase, where the quick wins from low-hanging fruit are fading, and the company now 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 and development investment and operating margin pressure.”

As a result, Deutsche Bank thinks Sage’s earnings per share and free cash flow are unlikely to exceed low to mid-single digit growth over the medium term, well below the software peer group average.

The bank said investors are unlikely to assume there will be a payback that sufficiently compensates for this “relatively meagre outlook” given Sage’s historically “somewhat indifferent” execution around product development.

It believes the low growth outlook and execution risk around cloud are not being sufficiently discounted.

In mid-morning trading, shares in Sage were down 1.2% to 746p.

Quick facts: The Sage Group plc

Price: 740.8 GBX

LSE:SGE
Market: LSE
Market Cap: £8.07 billion
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