Micro Focus International shares crash again

Shareholders will hope a new broom can fix the firm’s problems. These analysts think it can.

Another grizzly chapter in the remarkable stock market life of Micro Focus International (LSE:MCRO) left shares in the former blue-chip income play at one of their lowest levels since 2014 today.

At just 806p after this morning's 18% results-day tumble, the technology company is now back where it was prior to the spectacular acquisition spree that culminated in 2017's ill-fated deal to buy the software segment of Hewlett-Packard Enterprise for $8.8 billion.

As Micro Focus admitted today alongside a 41% slide in operating profits to $221.7 million, it underestimated the challenges and the greater than expected complexities posed by the acquisition, which included parts of former stock market star Autonomy.

Source: TradingView Past performance is not a guide to future performance

Micro Focus will now pin its hopes on a reset of the business, having announced a strategic review in the wake of a profits warning in August. The findings published today reveal the need for near-term investment and various self-help measures but no asset sales.

The company, whose technology helps major businesses to extend the life of mature software assets, also announced that Kevin Loosemore will leave the business this month.

His lengthy spell as chairman dates back to the company's 2005 IPO, when it had revenues of just $100 million. Loosemore took the company all the way to the FTSE 100 index as one of just two top-flight stocks, with shares above 2,700p at one point in November 2017.

It's been a rollercoaster ride for shares since then, with the HP difficulties exacerbated by tougher economic conditions and customers taking longer to reach decisions.

Loosemore, who was recently handed the chairman's job at troubled banknote printer De La Rue (LSE:DLAR), will be replaced at the helm by Greg Lock.

The record of Lock should offer comfort to Micro Focus investors, given that his 45 years’ experience in the software and computer services industry includes a successful decade as chairman of Computacenter (LSE:CCC). It was the “best job I've ever had”, he admitted last year.

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Lock is now looking forward to “rolling his sleeves up” to help execute the Micro Focus turnaround plan alongside chief executive and former IBM colleague Stephen Murdoch.

The pair can still count on plenty of support in the City, even though the strategic review will result in short-term pain through higher upfront costs, margin reduction and a sales impact from initiatives such as the accelerated transfer of more products to a subscription model.

The new guidance from Micro Focus is for revenues to fall in the current financial year by between 6% and 8%, prompting Numis Securities to cut its earnings per share forecast for the 2020 and 2021 periods by between 16% and 18%.

Based on these new forecasts, the broker now has Micro Focus trading on a price/earnings multiple of just 7.8x with a dividend yield of 6.5%. 

That's a lowly valuation for a global software business, particularly given its record of annual compound shareholder returns of 29.3% in the 12 years following its IPO in 2005. Dividends per share have grown from 6 cents in 2006 to 100.84 cents in 2018, although this was cut back to 58.33 cents today.

Numis added: “We think additional self-help and near-term investment is in the long-term interest of the group.

“Our price target of 1,200p recognises the ongoing challenge, although we think 2,000p is realistic if the group hits management's medium-term objectives.”

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Should all go to plan by 2023, Micro Focus said it expects to be delivering flat-to-low single digit revenues growth with an underlying earnings margin in the mid 40s.

Analysts at Stifel said they believed the current problems were fixable, adding that investors could take comfort from the fact that Sage has already come through similar difficulties. They have a “buy” recommendation and price target of 1,845p, reduced from 2,052p.