Citi still sees potential in Sage Group despite the surprise profit warning last week, with the bank's conviction unchanged on its belief in the demand for the accounting software firm's products.
Sage on Friday saw its shares drop more in one day than they had done for 24 years after warning on first-half profits ahead of schedule, complete with inconsistent levels of operational execution and a lowered full-year guidance on revenue.
“Post the 2018 capital markets day, we said execution was key, and this update is disappointing in our view,” Citi's analysts said.
However, Citi noted that in terms of its thesis on Sage, its conviction level around two of its three core premises, demand and cost rationalisation, was unchanged. However, a “tempered optimism” now exists around its revenue profile, the third of its core premises, which triggered cuts to its estimates.
Analysts reduced overall organic revenue growth forecast for the 2018, '19 and '20 financial years by one percentage point each year. “We also trim operating margin estimates to reflect the lower top line,” the analysts concluded.
Citi maintained its 'buy' rating on Sage, but cut its target price to 750p from 780p as a result of its unchanged discounted cash flow approach, revised estimates and higher weighted average cost of capital.