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Sophos - Solid quarter as takeover approaches

Nicholas Hyett | 6 November 2019 | A A A
Sophos - Solid quarter as takeover approaches

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Sophos Group plc Ordinary 3p

Sell: 572.30 | Buy: 572.30 | Change 0.30 (0.05%)
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First half billings, representing the value of contracts agreed with customers, rose 9% at constant currency to $372m. However, underlying operating profits fell 2% to $49.4m, as sales and marketing costs increased.

Sophos confirmed no interim dividend will be paid, following the recommended $7.40 per share cash offer by private equity group Thoma Bravo.

The shares were broadly unmoved in early trading.

View the latest Sophos share price and how to deal

Our view

The Thoma Bravo offer still needs shareholder and regulatory approval - but with the three largest shareholders already on-board and no obvious regulatory conflict we see little chance of it falling at those hurdles.

The offer comes after a painful couple of years for investors. The group repeatedly missed guidance in 2018 and the shares took a pounding as a result. More recent results have stabilised the ship somewhat, but growth has been slower and investor confidence needs a lot of rebuilding. Against that background we suspect most investors will be grudgingly happy with the offer.

We would flag that the offer is denominated in dollars. If the recent volatility in sterling is anything to go by that means the final pounds and pence value of the deal could end up being significantly different to that reported today. If sterling weakens then that's good news for UK investors, but should a Brexit deal be agreed, a rally in sterling could leave investors out of pocket.

For those unwilling to stomach the volatility and who want to lock in the current price, it might make sense to sell the shares now rather than hold on until the deal completes. Of course that also rules out any potential benefit from a bump in price if there is a rival bid - although as yet there's no evidence of any other party showing an interest.

Assuming this deal goes through, holding Sophos shares will be more of a currency call than anything else. The decision of whether to hold the shares until the deal completes or not will depend mostly on individual investors' views of what the future holds and their appetite for risk.

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Sophos Results (Constant Currency)

Billings growth was driven by a 40% increase in Next-generation products, which now account for 56.1% of the total, partially offset by a decline in hardware sales. The group finished the half with 409,000 customers compared to 382,000 last year.

An 11% increase in subscription revenues offset a 5% decline in hardware, with group revenue up 8% to £365.8m as a result.

Cash profits, as measured by earnings before interest, tax, depreciation and amortisation, rose 23.7% to $66.8m, reflecting revenue growth and accounting changes. Free cash flow rose 15.1% to $93.8m.

The group's net debt fell 44.8% to $70.5m.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.