UK’s 2017 Equity Star Lands With a Thud in 2018

Sophos Group Plc, one of London’s best performing stocks of 2017, has entered 2018 with a thud. Shares in the cybersecurity company fell as much as 18 percent on Thursday, the most since the June 2016 Brexit vote. At least one analyst thinks the fall is “insane,” but others say legitimate questions have been raised over the sustainability of Sophos’s momentum after a 130 percent rise in its share price in the 12 months prior to Thursday.

Northern Trust Capital Markets senior analyst Ameet Patel says there is “at least some reason to question” the stock’s upward progress and it would be “wise” to take profits, while Numis analyst David Toms questioned the scale of a slowdown in third-quarter billings growth.

Ameet Patel, Northern Trust Capital Markets

Northern Trust Capital Markets had been a buyer of Sophos since its 2015 IPO on the view it offered good exposure to the cybersecurity market. The company has “wowed” along the way with earnings beats and guidance increases.

Yet while the long-term thematic argument remains “interesting”, the initial read on the third-quarter update is that there is “at least some reason to question” Sophos’s momentum and it would be “wise” to take profits.

David Toms, Numis (Hold from Add, 570p PT)

Billings growth of 14 percent at constant currencies in the third quarter “looks light” against 23 percent growth in the first half. The key issue is why billings slowed so much when the company should be benefiting from a bigger renewals book.

Overall, the slowdown “is a little worrisome, particularly given the renewals tailwind in the quarter, but probably more significantly, the beat-and-raise pattern at Sophos looks to be, at least temporarily, on hold for now.”

Neil Campling, Mirabaud Securities

The price reaction is “insane.” While third quarter billings growth was slower than the first half, it was in line with guidance and comes against a tough comparative due to a product launch in the third quarter of the prior financial year.

The reason for the share price weakness is likely the miss on unlevered free cash flow, but this is down to investments in new product launches and “ironically, these same new product releases will likely drive very strong fourth-quarter billings.”

UBS, Michael Briest (Buy, PT 720p)

Third-quarter billings were “OK”, but investments weighed on margins. In the prior financial year, investments in new products were skewed to the fourth, rather than the third quarter.

Tougher second-half comparatives for Enduser products should have been anticipated and cost seasonality has been “very varied” in the past.

— With assistance by Giles Turner, and Lisa Pham

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