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 (30th 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-22-19, before the market closed (Source: Thomson Reuters)


On 22nd October 2019, Micro Focus International Plc shares were trading at GBX 1,009.80 at the time of writing before the market close (at 2:01 PM GMT), down by 0.26% against the previous day closing price. Stock's 52 weeks High and Low are GBX 2,174.50/GBX 999.40.


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 has 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 $433.10 million 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 current price of GBX 1,009.80 (as on 22^nd October 2019, before the market close) with single-digit upside potential based on 7.30x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).
 

Oxford BioMedica Plc

Oxford BioMedica Plc (OXB) is a United Kingdom (Oxford) based biopharmaceutical company. The group provides research, development and bioprocessing services of gene and cell therapy. The Group has also entered into several partnerships through which it has long-term economic interests in other potential gene and cell therapy products and has created a valuable proprietary portfolio of gene and cell therapy products in diverse areas. 

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

(Source: Interim Report, Company Website)
 
In the first half of the financial year 2019, driven by low licence income received for the period, the company’s revenue declined by 9 per cent to £32.1 million as against £35.3 million in H1 FY2018. In H1 FY2019, the company’s gross profit was at £20,397 thousand versus £25,210 thousand in H1 FY2018. Due to an increase in the operating expenses and non-operating expenses for the period, the company reported an operating loss of £6,061 thousand in H1 FY2019 versus an operating profit of £9,386 thousand in H1 FY2018. Driven by an increase in financial expenses, the company reported an LBT (loss before tax) of £12,113 thousand in H1 FY2019 versus a PBT (Profit before tax) of £5,180 thousand in H1 FY2018. The company’s LAT (loss after tax) stood at £10,168 thousand in H1 FY2019 versus a PAT (Profit after tax) of £5,180 thousand in H1 FY2018. The basic loss per share stood at 14.83 pence in H1 FY2019 versus basic earnings per share of 8.05 pence in H1 FY2018. The diluted loss per share stood at 14.83 pence in H1 FY2019 versus diluted earnings per share of 7.56 pence in H1 FY2018.
 
Share Price Performance

 Daily Chart as at October-22-19, before the market closed (Source: Thomson Reuters)

On 22nd October 2019, Oxford BioMedica Plc shares were trading at GBX 547.38 at the time of writing before the market close (at 3:02 PM GMT), up by 6.49% against the previous day closing price. Stock's 52 weeks High and Low are GBX 794.88/GBX 461.50.

Valuation Methodology

*Peers: Vitrolife AB, Poxel SA, Vectura Group Plc, Circassia Pharmaceuticals Plc and Formycon AG.

Conclusion
 
The company had shown a decline in financial performance in the first half of the financial year 2019. Both the top-line and the bottom-line had declined, and the profitability remained in the negative zone for the period.However, the company’s commercial pipeline remains robust, and its customer base continues to diversify, enhancing its revenue expectations. The company continue to sign new commercial contracts in 2019, which will bolster its commercial development and bioprocessing pipelines. The company is focusing on increasing programmes and partners for feasibility studies on cell therapy and potential gene.
 
The company is building new OxBox bioprocessing facility, which will help Oxford Biomedica to capture more partners and take full advantage of the Pharmaceuticals & Biotechnology sector in the near future.

Over the course of 4 years (FY14 - FY18), the company’s revenue surged from £13.62 million in FY14 to £66.78 million in FY18. Compound annual growth rate (CAGR) stood at 48.80 per cent.

Based on the decent prospects and supported by valuation done using the above method, we have given a “SPECULATIVE BUY” recommendation at the closing price of GBX 514.00 (as on 21^st October 2019) with a single digit-upside potential based on 5.70x NTM EV/Sales (approx.) on FY19E Sales (approx.).

 
*All forecasted figures and peers have been taken from Thomson Reuters. Currency exchange rate taken for 1 USD = 0.77467 GBP.
*The “Speculative Buy” recommendation is also valid for the current price as covered in the report (as on October-22-19).

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