You need a trailing slash (or more specifically, a slash to denote the end of your replacement string and the start of flags):
SEDCMD-test = y/o/O/
From the props.conf SEDCMD section:
substitute - y/string1/string2/
Good catch. I was trying to come up with the simplest example possible, and had a typo. However, it still doesn't work (screenshot updated). Does it work for you?