We value Sage using a standalone DCF and our target price of £15 factors in revenue growth of ~9% p.a. over FY2025-28 moderating to ~4% by FY36. We model operating margins rising from current c23% levels to ~25-26% by FY28. Our WACC assumption of 7.9% is based on a risk-free rate of ~3.1%, equity risk premium of 4.3% and cost of debt of 5%.

Risks to our investment thesis and target price include the following:

Macroeconomic risk — Geopolitical tension, inflation, tariff negotiations have created greater than usual uncertainity around the macroeconomic backdrop.

Technology and commercialisation risk - Ability to bring innovation to clients through new functionalities and serviecs is crucial for Sage to sustain growth rate. New AI technologies in particular present both opportunity as well as threat. 

Margin expansion potential — A lower or higher level of reinvestment in the business for strategic reasons could influence the pace of margin recovery.

M&A / Divestiture — SGE has the balance sheet flexibility and FCF profile to do M&A. In addition, Sage has identified business for value creation options. The outcome of above over time poses two-way risk.

Competition risk — Sage operates in a fragmented competitive ladscape given its global presence and catering to diferent customer segment (size). In particular the mid-market where Sage derives majority of revenue from is seen as future target market for many small business software peers.

If the impact from any of these factors could present upside / downside risk to our estimates and TP.