Shares I love: Micro Focus

"As holders of Blackberry and Nokia will have noticed in recent years, the threat of obsolescence is never far away for any technology company. However, while a mobile phone can be easily replaced, it is much more difficult for a large corporation to change a critical mainframe system, even if it is - in computing terms- a geriatric.

Micro Focus, the UK software business, develops products that help ensure its customers' core business applications can respond to these changes. Micro Focus' reported results for the half year to October 2015 demonstrated the benefits of last year's acquisition of Attachmate. While this deal significantly increased Micro Focus's scale and offered significant cost synergy opportunities, which are being delivered ahead of expectations, one asset in particular has garnered most interest.

Suse is a leader in the fast-growing paid enterprise Linux market and accounts for around 20 per cent of Micro Focus's revenues. Although Linux is an open-source operating system, enterprises are willing to pay subscriptions to businesses like Suse that can assist with product security, deployment and support. In the first half of the year, Suse's sales increased by 14 per cent over the previous year and delivered profits ahead of expectations. Based on peer valuations, Suse would have a standalone valuation of around $1.8bn - about 35 per cent of Micro Focus' market cap.

Micro Focus' management faces a pleasant dilemma: sell Suse, return cash to shareholders and focus on the knitting; or keep Suse and maintain a high-growth arm alongside the legacy businesses. Shareholders should be well-rewarded either way.

Micro Focus trades at a significant discount to its peers and as the company continues to deliver on the synergies from the Attachmate deal, it should continue to deliver management's targeted 15 per cent to 20 per cent annual returns for shareholders via earnings and dividend growth."