SAP ?hold?

25.01.07 - AC Research

LONDON, January 25 (newratings.com) - Analyst Henning Wagener of AC Research reiterates his "hold" rating on SAP (SAP).

According to AC Research?s research note dated January 24 and published this morning, the company has reported its targets for the current fiscal year of 2007. In the segment of software and other software related service revenues, which means the sum of all software, services, and subscription revenues as well as all other software related service revenues, SAP expects a constant currency growth rate of 12%-14%. In 2006, the company generated 12% growth. To exploit additional market opportunities in the segment of medium-sized corporations, the company will invest an additional ?300-?400 million over the next two years. These investments are designed to open up new business segments. Therefore, SAP?s operating margin will go down to 26%-27% in the current fiscal year. In 2006, the company?s operating margins were at 27.3%.

At the same time, SAP published some slightly revised results for 2006. Due to a ?30 million displacement of orders, license sales were reduced to ?3.071 billion. This ?30 million will now appear in the books for 2007. Thus, license sales were up roughly 10% in 2006. Accordingly, total sales were down to ?9.402 billion. Operating margins stood at 27.3%, while earnings per share reached ?1.60.

In all, the company?s outlook on 2007 received a slightly critical acclaim. SAP did not offer a separate forecast for license sales, which are included in the software and software related service revenues. Since license sales are SAP?s most relevant feature in order to rate the company?s potential for growth, the absence of a separate forecast for license sales seems to be somewhat negative, the analyst says.

At Tuesday?s closing price of ?38.37 and a 2007 P/E ratio of about 22, the company?s stock still seems to enjoy a rather adequate rating. The increasing focus on medium-sized companies is basically considered as positive, AC Research mentions. The analyst adds, however, that one has to wait and see whether SAP will be able to keep the high profit level with respect to this group of customers.

AC Research reiterates its "hold" rating on SAP.