Business Overview
Micro Focus Plc (MCRO) is engaged in delivering and supporting software solutions. It is a pure-play software firm in the world, focused on developing, selling and supporting software. The company focuses on offering an invariably high level of consumer satisfaction through extraordinary product implementation. They help around 40,000 customers that are from small and medium-sized enterprises to the majority in the Forbes Global 2000 list. The company operates five portfolios with approximately 500 product lines. MCRO was incorporated in the year 1976 and located in Newbury, the United Kingdom. The company is listed on the London Stock Exchange and on the New York Stock Exchange. The company is a part of the broader benchmark index FTSE 100.

Key Product Portfolio: Application development, Collaboration solutions, IT operations management, Analytics and Big Data, Information Management and Governance, Security, test and delivery, Mainframe, and COBOL.

Key Statistics



Key People:  Stephen Murdoch, Chief Executive Officer; Kevin Loosemore, Executive Chairman; and Brian McArthur-Muscroft, Chief Financial Officer.

Financial Highlights (FY 2018, $ million)


(Source: Preliminary Result FY18, Company Website)

Financial Commentary
Revenue
The company has reported group revenue of $4,754.4 million and an operating profit of $376.8 million for the 18 months ended 31st October 2018, due to the transformational nature of the HPE Software acquisition. Pro-forma revenue of $4,058.0 million for the twelve months ended 31st October 2018, shows 5.3% decline on pro-forma constant currency basis as compared to $4,286.8 million reported in 2017. The company pro-forma revenue (actual FX rates) dipped by 4 per cent to $4,058 million for the year ending October 2018 as compared to $4,226.7 million in 2017 for the same period mainly due to the impact of the foreign exchange. Micro Focus product portfolio from continuing operations pro-forma revenue of $3,684.3 million for the 12 months ended 31st October 2018 shows 7.1 per cent decline on pro-forma constant currency basis as compared to $3,964.1 million reported in FY17. The product portfolio pro-forma revenue (actual FX rates decreased by 5.7 per cent to $3,684.3 million for the year ending October 2018 as compared to $3,906.5 million in 2017 for the same period due to the foreign exchange constant currency impact.
EBITDA
Group’s Adjusted EBITDA (actual FX rates) stood at $1,529.6 million for the 12 months ended 31st October 2018 against $1,401.1 million reported last year. There was an increase of 9.2 per cent in adjusted EBITDA (actual FX rates) of the company, reflecting strong progress in the cost management actions related to the integration programme. The company reported 37.7% adjusted EBITDA margin for the 12 months ended 31st October 2018 against 33.1% reported last year. The company’s product portfolio from continuing operations adjusted EBITDA (actual FX rates) was surged to $1,413.6 million in FY18 as compared to $1,301.1 million in FY17. The product portfolio reported 38.4 per cent adjusted EBITDA margin (actual FX rates) for the 12 months ended 31st October 2018 against 33.3% reported last year.
Others
The company has reported profit before tax of $34.1 million and profit of the period of $784.1 million for the 18 months ended 31st October 2018. Driven by the company's positive trading performance, diluted EPS was 196.17 cents in 31^st October 2018 (unaudited). The company reported basic EPS of 201.7 cents.

Financial Ratios


(Source: TR)

Ratios Commentary
In October 2018, the gross margin decreased to 68.1 per cent and was less than the industry median. The reported gross margin was significantly down as compared to the corresponding period of the last year. The company’s reported EBITDA margin increased from the last six months and was well above as compared to its peers. In October 2018, the company net margin decreased significantly and registered 46.1% loss as compared from the previous year data. The liquidity position of the company was significantly better than the industry in terms of quick ratio. Both the quick ratio and current ratio improved from the previous year data. A firm’s equity backs the same proportion of assets as of its peers. The company’s debt-equity ratio surged to 0.63x from 0.60x as reported in April 2018 and is well above than the industry median. It reflects the company is highly leveraged as compared to its peers.

Stock Performance


Daily Chart as at Mar-11-19, before the market close. (Source: Thomson Reuters)

On March 11, 2019, shares of Micro Focus were trading at GBX 1,884.5 (before market close), up by 2.141 per cent against its previous day closing price. Stock’s 52 weeks High and Low is GBX 2,033/GBX 782.20. At the time of writing, shares were trading 7.30 per cent lower than its 52w High and 140.92 per cent higher than its 52w low. Micro Focus share price increased significantly by 25.90 per cent in the last three months (as at March 8, 2019), and in the last one year, the stock was down by 7.84 per cent returns. Stock’s average traded volume for 5 days was 1,531,767.80; 30 days - 1,588,540.37 and 90 days - 1,425,431.06. The average traded volume for 5 days was down by 3.57 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.46, reflecting high volatility as compared to the benchmark index. From a technical standpoint, the stock was trading above its 200, 60, and 30 days’ simple moving average. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 12.5x as compared to the industry median of 11.1x. Total outstanding market capitalisation was around £7.60 billion.

Valuation Methodology

Method 1: Price/Cash Flow Multiple Approach (NTM) (Cash flow per share (FY19E) approximately)



Method 2: EV/Sales Multiple Approach (NTM)



To compare Micro Focus International PLC with its peers, EV/Sales value multiple has been used. The peers are Sage Group PLC (NTM EV/Sales was 3.88x), AVEVA Group PLC (NTM EV/Sales was 6.04x), Dassault Systemes SE (NTM EV/Sales was 8.10x), Sophos Group PLC (NTM EV/Sales was 2.77x), and Capgemini SE (NTM EV/Sales was 1.51x). The mean of EV/Sales (NTM) of the company’s peers was 4.6x.

(Note: All forecasted figures and Peer selection have been taken from the Thomson Reuters. All USD figures have been converted into GBP; USD: GBP - 0.77)

Recent News
Brain Mcarthur-Muscroft joined the company on 21^st February 2019 and appointed to the Board. He was appointed as the Chief Financial Officer (CFO). On 14^th February 2019, the company announced the share buy-back programme. The first extension of the company buyback programme was in between November 6, 2018, and February 13, 2019. The company buyback 13 million shares for about $229 million. On 14^th February 2019, Micro Focus announced the acquisition of Interset Software INC. Interset is a worldwide leader in the security analytics software that includes accurate cyber-threat protection and highly intelligent.
 
Growth Perspective and Risk Assessments
A strong business model is being used to focus on maximising and sustaining a track record of delivering value accretive growth. As per the management guidance for the next financial year, the micro focus product portfolio constant currency revenue forecasted will decrease by 4 per cent as compared to the current year revenue data.
 
Conclusion
The company’s growth prospects look favourable as innovations have been done to cut down on costs. With the current trading levels which indicate the stock movement towards 52-week high with support coming from a few growth drivers like $110 million extended share buyback programme, accelerated revenue growth and the valuation done using the above method, we have given a BUY recommendation at the closing price of GBX 1,845 (as on 8th March 2019) with single-digit upside potential based on 12.67x NTM Price/Cash flows on FY19E cash flow per share and 4.6x NTM EV/Sales Value on FY19E sales.

*The buy recommendation is also valid for the current price as covered in the report (as on Mar-11-19).

Note- GBp or GBX are interchangeably used for Pence Sterling.

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