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Shore Capital downgrades Sophos to 'hold'

By Iain Gilbert

Date: Tuesday 13 Nov 2018

Shore Capital downgrades Sophos to 'hold'

(Sharecast News) - Analysts at Shore Capital downgraded IT security outfit Sophos to 'hold' on Tuesday, stating that the leap in billings seen a year ago looked more likely to be a limp this time around.
Shore Capital said the 22% growth in the company's billings and 31% increase in cash EBITDA would not be repeated in its current trading year, with billings limping towards a 3% improvement and cash EBITDA on course for a 10% decline year-on-year.

With Sophos' management pointing to tough prior year comparatives for its lacklustre performance, Shore Cap said this was "only half the story" - with slower growth in customers, a moderating renewal rate and a significant ramp-up in operating expenditure throughout the first half having also impacted performance.

"In previous guidance, Sophos essentially misjudged these factors, in particular, what a normalised renewals rate should be, leading to the cuts to the FY19 outlook we've seen since July," said Shore Capital analyst Martin O'Sullivan.

The analyst said these issues had "undoubtedly" muddied the investment waters, and while noting that a case could be made for short-term share value being around 400p, based upon a 6% free cash flow yield for its current year, O'Sullivan said he did not "confidently expect this to be unlocked over the next 3-6 months".

"We see better value elsewhere in the sector with less risk of quarterly earnings volatility and associated downside surprise. We believe sustainable upside awaits evidence of a return to double-digit billings growth, which may not be seen before Spring/Summer 2019."

Shore Capital kept its 339p target price on the firm's shares unchanged.

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