A quick note today to catch up on what was out yesterday and today's news. Stocks which featured that I have covered in the past included Micro Focus (MCRO), Photo Me (PHTM),
S & U (SUS) and Sprue Aegis (SPRP). While today we have had announcements from Bellway (BWY) and Polar Capital (POLR)..
In brief we have had an update from Intermediate Capital Group (ICP) - which I have held and written up in the past. The last time I wrote I felt they were probably fairly fully valued at around 590p. Since then they have fallen back a bit with the market, so does today's update change the view? Not really although to be fair they saw very strong inflows into existing funds, but did warn that Q2 would slow as they launch new funds which take longer to gain traction with investors compared to those with a longer track record. They also suggested that the current Eurozone uncertainty could have some impact on their business and the weak euro may trim some of the interest income, although fee income is hedged.
So overall a reasonable update which has seen the shares up by 2% or so today to 578p. It seems it should support the shares, but probably not enough to send it through resistance from the recent price highs around 600p. However if they continue to progress as the year goes on and the European situation calms down then they could progress more in the medium term.
Otherwise late yesterday we had an announcement from Microfocus (MCRO) about an accelerated book build for a placing of 20m shares from Wizard as the lock up post the recent deal ended. This was done at 1350p and leaves them with a stake of around 30%. This suggests they think these shares are now up with events perhaps and obviously there could be more placings to come in due course. So on that basis this one may well also be capped around here for now I suspect given that and the 16x PE and 2.5% yield.
...after the excitement at the end of last week with PLUS500. Today we have had a couple of trading updates from Cineworld (CINE) and Micro focus (MCRO).
Cineworld saw pretty good growth across the board in both the UK and emerging markets in which it operates. They also opened a few new cinemas with lots of screens in the UK and overseas with 16 planned for the rest of the year split evenly between the UK and overseas. This together with what looks like a more attractive film schedule for this year means they are probably well set to deliver decent growth again. However, the rating anticipates this to a certain extent with the shares standing on over 18x with a sub 3% yield and an earnings yield of less than 5%. So overall not cheap, but looks like it should continue to grow well against an improving consumer background so I guess it could continue to show some good price momentum despite the rating. However having been bored by the Marvel Avengers Assemble film on TV last night I still remain somewhat bemused by the attraction of all these comic book films but each to their own.
On Micro focus today we have had a new piece of management speak. In the past I have pointed to managements saying they are trading "broadly in line" which is code for slightly behind. In today's statement they say: "At the Interim results presentation in December 2014, management provided guidance of combined pro-forma full year* revenues of c. $1,330 million and combined pro-forma full year* Underlying Adjusted EBITDA** of c. $500 million, based on the exchange rates then prevailing. The Board is pleased to reconfirm that the Group expects to report revenues and Underlying Adjusted EBITDA comfortably in line with this guidance on a constant currency basis."
So I take "comfortably in line" to mean were confident of meeting or slightly beating expectations but don't want to upgrade them at the moment. On this basis I assume the forecasts will be fine but with scope for upgrades especially if the integration of last years acquisition goes better than expected as is sometimes the case. They may need this as these are also looking more fully valued now on around 16.5x with a 2.5% yield and an earnings yield of close to 3% so probably a hold up here. Hmm comfortably in line - puts me in mind of a song appropriate for post bank holiday blues...
Micro Focus (MCRO) has today announced a merger with The Attachmate Group, Inc. which technically for the purposes of the Listing Rules amounts to a reverse takeover by Micro focus given the size of the deal. They are paying a total enterprise value of US$2349.8 million for a Company which In the year ended 31 March 2014 generated revenues of $956.8 million and Underlying Adjusted EBITDA of $312.8 million. So it seems like a reasonable 7.5x EV/EBITDA multiple and the company say that they expect it to be significantly earnings enhancing in the current financial year ending 30 April 2015 and thereafter, with scope for further benefits as operational improvements are realised across the combined entity.
I would take this to mean 10% plus and it seems the market likes it as the shares have been marked up by nearly 10% first thing this morning. You can read the full announcement at the link above, but otherwise the Company summarised some more of the benefits for the merger as follows:
- The Micro Focus Board believes that the proposed Merger presents a rare opportunity to achieve a significant increase in the scale and breadth of Micro Focus, through a merger with a business operating in market segments adjacent and complementary to Micro Focus and sharing the same characteristics of high recurring revenues, high operating margins and strong cash conversion; and with the potential to deliver Total Shareholder Returns ("TSRs") that are superior to those likely to be achieved on an organic basis.
- Creation of an enlarged global infrastructure software company with a top three global market position in a number of key segments, including off-mainframe COBOL, mainframe modernisation, host connectivity and Linux.
- The Enlarged Group's combined annual revenues amount to approximately $1.4 billion, with combined Underlying Adjusted EBITDA and cash generated from operations each amounting to approximately $0.5 billion p.a.
While they explained the rationale under the following headings:
Strategic rationale and operational benefits
The Board believes that the proposed Merger presents a rare opportunity to achieve a significant increase in the scale and breadth of Micro Focus, with the potential to deliver TSRs that are superior to those likely to be achieved on an organic basis.
The Directors consider that the businesses of Micro Focus and the Attachmate Group share a number of important attributes:
§ both are well established enterprise software vendors operating at a global scale with a presence in all significant international markets;
§ both are characterised by high Underlying Adjusted EBITDA margins (Micro Focus 45.4 per cent., Attachmate Group 32.7 per cent.)(3) and high recurring revenues (Micro Focus 66.3 per cent., Attachmate Group 71.3 per cent.);
§ both hold a portfolio of software solutions organised into different product groups which address specific aspects of the infrastructure software requirements of a substantial installed base of large enterprise customers, with no material customer concentration; and
§ both the Attachmate Group's and Micro Focus's respective product groups are (with exceptions) predominantly mature solution sets which are embedded within the IT infrastructures of large corporate customers.
§ The Board believes that the principal benefits of the Merger will arise mainly from the delivery, over the medium term, of operational improvements across the Enlarged Group.
§ Given the scale of the Enlarged Group, the Board believes that the operational efficiencies will be achieved in the medium term, primarily through reducing duplicated central costs and combining corporate support functions where appropriate. The Board will also seek to reduce or reverse areas of revenue decline, accelerate revenue growth where achievable, and enhance operating margins.
The financial effects, over and above the earnings enhancement are on the balance sheet and the level of debt. They state that this will take the combined net debt up to 3.3x the combined EBITDA which is above their previous 2.5x upper target / limit. They say they will look to get the debt back down to those kind of levels in the next two years from cash flows. On the back of this they say they are suspending further returns of value and share buy backs, although the recently proposed 60 pence return is still scheduled to go ahead and they are talking about a progressive dividend policy going forward.
Summary & Conclusion:
Seems like a sensible deal which is not only enhances earnings but also takes them into new products and markets related to their existing activities. However, they are buying off of VC's and the financial risks are increased given the size of the deal, integration risks and the levels of debt being taken on as a result. So this gives some pause for thought, but on balance it looks like a deal worth backing.
Updates today from three stocks I have written up in the past - see the categories list to the right of the blog for links to these.
In pole position on the grid we have an acquisition of Duncton Group from Provident Financial Group (PFG) and a small placing of £120 million of new stock to finance it. The Moneybarn operational brand that comes with it was founded in 1992, provides car finance to non-standard customers in the UK, operating mainly through brokers with additional distribution sourced through independent car dealers and from its website directly to customers. The business offers secured car loans, predominantly through conditional sale agreements and with the car typically used for necessities such as travelling to work rather than for luxury or discretionary purposes.
Provident Financial said in its announcement about the acquisition:
"The acquisition of Moneybarn broadens the product offering to the group's target customer base and creates a third leg of earnings that complements the organic growth opportunities available to the group. Moneybarn's origination has been muted recently, given funding constraints, and this leaves scope for growth going forward. The board believes that the business is highly scalable, given the strength of broker relationships and market leading credit decisioning, combined with the strength of the group's balance sheet. Potential opportunities for synergies with the group's existing businesses, including enhancements to underwriting and collections capabilities, the development of a business-to-consumer proposition and leveraging the Vanquis Bank customer base, will be evaluated post-acquisition."
They also mentioned that it will be immediately accretive to underlying earnings just on the basis of refinancing the £144.8 million of debt that comes with it. The price of seems reasonable at around 6x the stated pro forma EBITA of £20.3 million.
Overall seems like a sensible addition to their range of products at a reasonable price which enhances earnings immediately and provides scope for further synergies from enhanced underwriting, collections and cross selling to opportunities to existing customers.
Meanwhile Micro Focus (MCRO) have announced an in line interim management statement and a proposed return of value to shareholders of 60 pence per share, totalling approximately £84m ($140m) in cash. This is equivalent to around 7% of the recent share price of 864 pence - nice. The shares will undergo a consolidation when this is paid and shareholders will be able to choose whether to receive it as income or capital. This is in addition to the 3%+yield from the regular dividends that they are also expected to pay this year. On the outlook they said:
"Management's outlook remains unchanged from that given in the preliminary results for the year ended 30 April 2014 issued on 19 June 2014. We believe we have a strong operational and financial model that can continue to provide strong returns to shareholders. The model requires low single digit revenue growth in the medium-term and we remain confident that this can be delivered.
If the exchange rates experienced in the year to date were to continue for the remainder of the year, the comparative revenues for the year ended 30 April 2014 would increase from the reported $433.1m to $435.2m on a constant currency basis."
Finally today we have had interim results from Cineworld (CINE) - which seem to be fairly steady as they go about integrating after the merger with Cinema City. The figures are therefore a bit messy but they seem to have outperformed a fairly subdued cinema market in the period which was hit by the World Cup and a slower release schedule as a result. They have also suggested that synergies are now expected to be £5m of which £2m has already been achieved, although that doesn't seem that bigger deal in the context of an £800 million+ market cap.
They edged up the dividend by 2.7% to 3.8p on a rights adjusted basis and they are expecting a strong second half release schedule so they seem OK if a little dull on a P/E of 14x and a yield of 3.4% but they do have some more growth opportunities in less developed markets now.