Micro Focus eyes value extraction

HP Enterprise Software results show scope for profit improvement
Thursday 01 Dec 2016 Author: Steven Frazer

Firm evidence of profits trending upwards is emerging at HP Enterprise Software (HPES) ahead of its $8.8bn reverse takeover of FTSE 100 infrastructure software supplier Micro Focus (MCRO).

Fourth quarter and full year figures released by the US-based business (22 Nov) show a 1% operating profits gain to $290m, reversing the third quarter decline, while operating profit margins jumped 2.2 percentage points to 32.1% in the last three months of its financial year to 31 October.

BN MICRO FOCUS 011216

While full year operating profits dropped 4.9% to $749m for HPES, operating profit margins over the 12 months expanded from 21.8% to 23.4%.

In its last year to 30 April Micro Focus posted adjusted operating profit of $533.5m on £1.25bn revenues implying close on 43% operating profit margins and the group has a medium-term ambition to drag HPES’s profitability much closer to its own. David Toms, analyst at broker Numis Securities, anticipates HPES operating margins of circa 40% over the next few years.

Micro Focus management have long proven their skill at extracting substantial extra value from mature IT systems businesses. In 2014 it paid $2.35bn for US Linux and SUSE peer Attachmate, which at the time was generating 33% margins on an earnings before interest, tax, depreciation and amortisation (EBITDA) basis. These were improved to 46% over the next 18 months.

We have been long-run fans of the Micro Focus investment story, flagging the shares at 251p back in August 2011. The stock currently trades at £21.03, and we agree with those analysts that expect the stock to hit £27.00 levels over the next 12 to 18 months. (SF)

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