- Wage inflation remains a concern
- Reduction in the adjusted cash margin
The share price of Micro Focus International (MCRO) pulled back alarmingly after half-year revenue failed to match market expectations. The enterprise software group was understandably keener to highlight the narrowing pre-tax loss and the purported benefits that have accrued on the back of operational initiatives. It’s likelier, however, that investors would have taken greater account of the 9 per cent reduction in the half-year dividend and the revenue miss.
Management’s stance is justified to an extent. It pointed to a simplification of its cost base as evidence of operational progress, while it also lauded the 36.2 per cent increase in free cash flow as a reflection of improved quality of earnings. Costs have been reduced by approximately $150mn (£123mn) on an annualised basis (gross of inflation), leading to an adjusted 5.3 per cent decrease at the operating level. However, this needs to be set against a 130-basis point decrease in the constant currency adjusted cash margin to 35.4 per cent.
Micro Focus, in common with many industry peers, has had to cope with elevated levels of wage inflation and staff attrition, yet it has managed to reduce costs across all cost categories except for administrative expenses. A creditable performance on this front but it is likely that we have yet to witness the full impact wage inflation on the wider economy. There is no change in full-year expectations for revenue, costs or cash, but consensus forecasts and the associated target price - currently a 48 per cent premium to the market price – will be subject to reappraisal. Some positives, but many of the near-term challenges are beyond the influence of management. Hold.
Last IC View: Hold, 407p, 08 Feb 2022
|MICRO FOCUS (MCRO)|
|ORD PRICE:||291p||MARKET VALUE:||£ 986mn|
|TOUCH:||291-292p||12-MONTH HIGH:||554p||LOW: 286p|
|DIVIDEND YIELD:||5.4%||PE RATIO:||NA|
|NET ASSET VALUE:||789¢*||NET DEBT:||134%|
|Half-year to 30 Apr||Turnover ($bn)||Pre-tax profit ($mn)||Earnings per share (¢)||Dividend per share (¢)|
|£1=$1.22. *Includes intangible assets of $7.52bn, or 2,237¢ a share.|