...today so the piece I promised in yesterday's post about Tesco's troubles will have to wait for another day. We have had interim results from Micro Focus (MCRO) - which is a member of the FTSE 250, and describes itself as providing innovative software that helps companies to improve dramatically the business value of their enterprise applications. For For additional information you can go to www.microfocus.com or see my previous write ups from earlier in the year here.
Despite flat turnover they claimed that their adjusted EBITDA was ahead of market expectations at $102.5m, an increase of 17.4% on a constant currency basis, with a margin of 49.2%. This led to adjusted diluted earnings being up by 34% and they raised the dividend by a useful 10% to 15.4c which comes on top of the recent 4th return of value worth 60 pence that they paid recently. Despite this and costs associated with the recently announced Attachmate acquisition, Net debt at 31 October 2014 decreased to $258.9m (April 2014: $261.0m).
Talking of the acquisition, which they completed on 20 November 2014, on this they say:
"This is a transformational transaction for Micro Focus and has the potential to deliver significantly higher returns to our shareholders over the medium-term than our base case of 15% to 20% per annum. The acquisition of Attachmate represents a very exciting opportunity for the Enlarged Group. The initial phase of the integration has started and the medium-term objective remains the same - for low single digit revenue growth - in order to continue to deliver the financial model that we have set out."
This model is expanded on in the statement as follows:
"The Board has set out a clear strategy of delivering consistent Total Shareholder Returns ("TSRs") in excess of Micro Focus' risk adjusted cost of capital, with an objective of achieving TSRs of 15% to 20% per annum over the long-term. This objective has been comfortably exceeded over the three financial years ended 30 April 2014, through a combination of growing earnings per share, improving the consistency of the Company's financial performance, returning cash to shareholders, and selectively reinvesting cash flow from operations into accretive acquisitions and into improving the quality of the Micro Focus Group's product portfolio and "Go To Market" propositions. The Board believes that the acquisition 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.
Attachmate was a privately held enterprise software infrastructure company headquartered in Houston, Texas, United States with approximately 3,300 employees. Attachmate's consolidated revenues for the financial year ended 31 March 2014 were $956.8m and Underlying Adjusted EBITDA was $312.8m for the same period. The directors consider that the businesses of the Micro Focus Group and the Attachmate Group share a number of important attributes:
· both the Micro Focus Group and the Attachmate Group are well established enterprise software vendors operating at a global scale with a presence in all significant international markets;
· both the Micro Focus Group and the Attachmate Group are characterized by high Underlying Adjusted EBITDA margins (Micro Focus 45.4%, Attachmate 32.7%) and high recurring revenues (Micro Focus 66.3%, Attachmate 71.3%);
· both the Micro Focus Group and the Attachmate Group hold a portfolio of software solutions organized into different product groups which address specific aspects of the infrastructure software requirements of a substantial installed base of large enterprise customers; and
· the majority of both the Micro Focus Group and the Attachmate Group's respective product portfolios are predominantly mature solution sets which are embedded within the IT infrastructures of large corporate customers.
Summary & Conclusion
Another set of good numbers and a useful dividend increase from Micro Focus and a good start to the integration of what seems to be a transformational deal. It has certainly led to a re-rating of the shares as you can see from the chart below although this has been supported by some good upgrades to estimates. However, it looks more fairly valued now on closer to 15x this years expected earnings with a yield of around 3% and indeed the shares, perhaps unsurprisingly, seem to have run into some profit taking this morning on the back of the numbers.
Certainly it is not as attractive now on value grounds so I could understand a desire to lock in profits and rotate into better value elsewhere that might be on offer after the recent volatility. However, given the attractive financial characteristics and benefits to come from the recent acquisition plus their shareholder friendly approach I would be inclined to run with it.
Talking of opportunities thrown up by recent volatility see today's Compound Income Advent calendar window for a stock which seems to have sunk badly recently, possibly on worries about slowing growth and weakening oil prices, although despite this they have been confident enough to undertake an acquisition to enlarge their business. So click on the window at the end to find out more about it and see if you think want to get on board or were right to abandon ship, discuss?
Sorry that's all I have time for today - see you tomorrow.