Micro Focus International Plc

Micro Focus International Plc (MCRO) is a British company engaged in the business of delivering and supporting software solutions, and its business involves acquiring companies whose margins it believes can improve and have a favourable business model. The company operates five portfolios with approximately 300 product lines and help around 40,000 customers, ranging from small and medium-sized enterprises to most of the companies listed in the Forbes Global 2000.

Financial Highlights – H1 Financial Year 2019 (30^th April 2019, $, million)

(Source: Interim Report, Company Website)
 
For the first half of the financial year 2019,the revenue (continuing operations) declined by 5.3 per cent on a CER (constant exchange rate) to $1,657.1 million as against $1,749.6 million in H1 FY2018. The company’s reported operating profit surged by 2.5 per cent to $32.6 million in H1 FY2019, while adjusted EBITDA at CER was $662.3 million. Adjusted EBITDA margin at CER was up by 2.8 percentage points to 40 per cent. Profit for the period, which includes discontinued operations, was $1,397.1 million, representing an upside of 125.4 per cent, while underlying diluted earnings per share growth (continuing operations) was of 8.4 per cent to 85.53 cents. The company reported underlying CCR (cash conversion ratio) of 115.1 per cent and FCF (free cash flow) of $429.9 million, while underlying net debt was $3,807.5 million in H1 FY2019 with net debt to underlying EBITDA multiple stood at 2.7 times.

Share Price Performance

Daily Chart as at October-11-19, before the market closed (Source: Thomson Reuters)

On 11th October 2019, Micro Focus International Plc shares were trading at GBX 1,068.20 at the time of writing before the market close (at 12:10 PM GMT), up by 0.41% against the previous day closing price. Stock's 52 weeks High and Low are GBX 2,174.50/GBX 1,021.60.

Valuation Methodology

*Peers: Avast Plc, Software AG, Atos SE, Indra Sistemas SA and Linedata Services SA.

Conclusion
The company had shown decent financial performance for the first half of the financial year 2019. Although the company’s top-line performance had declined, the company’s bottom-line performance has improved significantly. While leverage for the medium-term remained at a target of 2.7x. The company with its disciplined capital allocation and operational efficiency and supported by effective product management for a longer period, the company continues to execute as per the defined strategy and business model to provide returns to the shareholders. 

The company is planning to change its business model for granular level for appropriate allocation of investment on a product-by-product basis and to innovate products to deliver the best value to its customers. The company has repositioned its product portfolios with appropriate R&D, which will help in strong cash generation and profitability in a more balanced approach.

Over the course of 4 years (FY14 - FY18), the company’s revenue surged from $433.10million in FY14 to $4,754.40 million in FY18. Compound annual growth rate (CAGR) stood at 82.02 per cent.

Based on the above rationale and supported by the valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 1,063.80 (as on 10^th October 2019) with single-digit upside potential based on 7.60x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.).
 

Hostelworld Group Plc

Hostelworld Group Plc (HSW) is engaged in an online hostel-focused booking platform internationally. The group’s websites operate in more than 19 different languages by linking young travellers with hostels across the world through its Hostelworld brands, subsidiary brands Hostels.com and Hostel bookers. The group operates through data processing and software services that facilitate hotel, B&B (bed and breakfast), hostel, and other accommodation bookings.

Financial Highlights – H1 Financial Year 2019 (30^th June 2019, EUR, thousand)

(Source: Interim Report, Company Website)

For the first half of the financial year 2019, the company’s revenue stood at €38.8 million as against €42.6 million in H1 FY2018. Revenue (Excl. impact of deferred revenue) was at €43.2 million in H1 FY2019 versus €46.8 million in H1 FY2018. The total gross bookings for H1 FY2019 declined to 3.8 million from 4 million in H1 FY2018, driven by a decline from the supporting brands bookings. The company ABV (average booking value) increased by 6 per cent to €12.8 in H1 FY2019 as compared to €12.2 in H1 FY2018 and 2 per cent rise on a constant currency basis. Adjusted EBITDA stood at €8.9 million in H1 FY2019. The company’s PBT (Profit before tax) declined to €394 thousand in H1 FY 2019 from €2,833 thousand in H1 FY 2018. The Profit attributable to the shareholders increased to €6,520 thousand in H1 FY2019 from €2,044 thousand in H1 FY 2018. The basic earnings per share were at 6.82 cents in H1 FY2019 versus 2.14 cents in H1 FY2018. The group’s adjusted earnings per share were €6.44 cents in H1 FY2019 versus €7.93 cents in H1 FY2018. The group’s adjusted free cash flow was €9.6 million in H1 FY2019 as compared to €13.6 million in H1 FY2018. 

Share Price Performance

Daily Chart as at October-11-19, before the market closed (Source: Thomson Reuters)

On 11th October 2019, Hostelworld Group Plc shares were trading at GBX 110.00 at the time of writing before the market close (at 1:07 PM GMT), down by 1.78% against the previous day closing price. Stock's 52 weeks High and Low are GBX 253.98/GBX 107.60.

Valuation Methodology


Conclusion
The company’s financial performance has declined in the first half of the financial year 2019 as compared to H1 FY2018 data. The company’s top-line performance has declined, and the bottom-line performance improved due to tax rebate received by the company in the current period. The company operates in a highly competitive market.

The group’s main area of focus in FY2019 is on enhancing the capacity of the main platform to improve the experience and its flexibility for the consumers. The company is progressing well as per its Roadmap for Growth programme and investing in its core platform.

The company had announced a strategic investment in Tipi Pty Ltd, which will further benefit the hostel partners and customers. The company remained confident in capitalising the growth opportunities and expects its business to return to volume growth in the FY2020.

Over the course of 4 years (FY14 - FY18), the company’s revenue surged from EUR 79.27 million in FY14 to EUR 82.09 million in FY18. Compound annual growth rate (CAGR) stood at 0.88 per cent.

Based on above rationale and the valuation done using the above method, we have given a “Speculative Buy” recommendation at the current price of GBX 110.00 (as on 11^th October 2019, before the market close) with single-digit upside potential based on 9.00x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).  
 
*All forecasted figures and peer information have been taken from Thomson Reuters.Currency exchange rate taken for 1 USD = 0.81676 GBP and 1 EUR = 0.87416 GBP.
*The “Buy” recommendation is valid for the current price as covered in the report as on (11th October 2019).

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