Broker snap: Investec upgrades Sage to 'hold'

20th Jun 2012 11:00

Sage's acquisition of a majority stake in Folhamatic may be expensive, but it looks like a 'strategically sensible' deal, according to Investec which upgraded its recommendation on the stock from 'sell' to 'hold' on Wednesday morning.A 75% interest in Folhamatic, the Brazilian provider of accounting, tax and payroll and regulatory content software, was purchased for £125m, with its founder/chief executive retaining the remaining 25%. Investec reckons that the deal will add 3-4% to Sage's earnings before interest, tax, depreciation and amortisation (EBITDA) in a full-year."Therefore, after consideration of financing and minority interest, we expect it to be only marginally accretive initially. Sage have commented that it is not until the third year post acquisition that they expect the return on capital from the deal to achieve their hurdle rates," the broker explains.However, Investec admits that the acquisition is a little pricey, at three times Folhamatic's revenues and 13.4 times its EBITDA.Nevertheless, the broker said: "Clearly, growing by acquisitions make sense to Sage which is putting increasing focus on the top line. Brazil is a highly attractive market, both in terms of the growth backdrop, but also relative to the low level of software penetration against a complex tax regime. We would expect the business to continue to show strong growth."With no material downside remaining to its 240p target price, Investec has moved its recommendation to 'hold'."Whilst we do not feel that a lower target price is justified, we continue to see the business as facing considerably challenges, particularly in its established markets where sustainable, higher growth is harder to achieve."By 10:58, shares had gained 3.04% to 261.2p.BC