Micro Focus International PLC

Micro Focus International PLC (LON: MCRO) is an FTSE 250 index listed Software & Computer Service Company focused on enabling organizations to digitally transform the business.

The Company will pay an interim dividend of 8.80 US cents per share on 06 August 2021, while the ex-dividend date will be 22 July 2021.

Investment Rationale for Valuation – Avoid at GBX 417.00

• The leverage position of MCRO had worsened during H1 FY21 as the Net Debt/ adjusted EBITDA ratio increased from 3.4x during H1 FY20 to 3.6x for H1 FY21.
• The Company had been consistently reporting negative profitability metrics (operating margin & net margin) since H1 FY20, while the respective industry median remained positive.
• On the liquidity front, the current ratio of MCRO stood at around 0.80x remained lower than the industry median of 1.16x during H1 FY21.
• From a technical standpoint, the MACD line hovering below the signal line, indicating that the stock could decline in the near term.

Key Risks

• The recent change in CFO might dent the business growth of MCRO.
• The increased usage of remote services has escalated the threat of external fraud and cyber-attack.
• The failure of partner relationships could adversely impact the business in the near term.
  

Recent Developments 

On 01 July 2021, MCRO confirmed that Matthew Ashley has joined as the Chief Financial Officer of the Company effective from the same day. 

H1 FY21 Financial & Operational Highlights (for the six months ended 30 April 2021, as of 01 July 2021)

(Source: Company result)

• On a constant currency, the revenue had dropped by around 4.6%, and on an actual currency, it had witnessed a decline of about 2.0% during the period.
• The cash generated from operating activities had dropped from USD 560.4 million during H1 FY20 to USD 468.10 million for H1 FY21.
• MCRO had registered significant statutory operating loss from continuing operations of around negative USD 154.80 million during H1 FY21.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

Conclusion

The Company had considered revenue stabilisation by the end of FY23 as the key strategic priority. Moreover, MCRO would continue to make strategic investments to improve the annual revenue trajectory. Furthermore, the Company had an estimated expenditure of USD 70 million for H1 FY21 related to the claim made by Wapp Tech Limited Partnership accusing MCRO of the infringement of three patents. The stock made a 52-week low and high of GBX 205.80 and GBX 596.20, respectively. 

Based on the weak profitability, lukewarm H1 FY21 results, and lack of growth catalysts, we have given an “Avoid” recommendation on Micro Focus International PLC at the current market price of GBX 417.00 (as of 14 July 2021 at 09:15 AM GMT), while we will revisit our stance after analysis of upcoming corporate announcements made by the Company.

*The reference data in this report has been partly sourced from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

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