■ Organic growth recovery
■ Acquisitions on track
■ Search for new CEO ongoing
A third quarter trading statement from mainframe modernisation specialists Micro Focus International has rekindled investor interest in the company.
The group said that organic growth in the three months to 31 January had improved from the 5 per cent achieved in the first half. Moreover, full year profitability is expected to also improve on the back of growth in cash profit (Ebitda) margins, which are now expected to be about 40 per cent.
The period ended with borrowings of $97.4m (£62.4m), but strong cash generation should accelerate debt reduction and Micro Focus now expect to return to a net cash position sooner than planned.
The group geared up its balance sheet to acquire testing businesses Borland and Compuware last year, and the integration of these companies are on track. Meanwhile, the search for a new chief executive remains on-going with the group saying that it is "progressing well."
Charles Stanley says...
Buy. For us, the highlight of the third quarter was the improvement in organic growth from the core business. Organic growth dipped to 5 per cent in the first half against a target in normal trading conditions of 10 per cent, due to lower own equipment manufacturer (OEM) sales. OEM sales have improved, but the major driver seems to be that large licence deals for application modernisation have increased.
A large one-off deal at Borland has helped to lift margins, and we are confident an announcement on a new chief executive will be made by the summer.
Our earnings estimates had slipped to the middle of the range but on today's confident statement we are increasing our earnings estimates by a further 3 per cent. Both our peer group comparison and discounted cash flow-based valuations provide a target price of 650p.
KBC Peel Hunt says...
Buy. Third-quarter trading was in line with expected improvements in organic growth flagged in the interim announcement. With nearly everything bar a new chief executive in the shop window for the full year to 2010, the shares have been weaker. But they arenot expensive at these levels, and continue to have upside as debt is paid down and the company reassures over organic growth. Clearly, accelerated debt paydown has a positive impact on valuation. Better organic growth, as a result of a recovery in the OEM business, combined with new growth opportunities in the larger testing market, could support a further improved rating over time. The impact of the latter is too early to call, although news of a new chief executive could be a catalyst. Our target price has been raised to 556p from 475p.
