Citi downgrades Micro Focus after recent share price gains

Citi downgraded its recommendation on shares of Micro Focus International to 'neutral', but said it maintained a constructive medium-term view.

In a research note sent to clients, the broker said the one-year risk-reward trade-off for the company's shares was more balanced following its recent share price gains.

The stock had outperformed the Footsie by 14% since announcing it would acquire US rival HP Enterprise Software, which suggested the expected synergies from the merger had already been largely priced-in, the broker said.

Other reasons for the broker's caution towards the stock was the near-term volatility in HPE's revenues and headwinds from tax.

Citi also saw near-term flowback risks following deal completion.

In terms of valuation, on a proforma calendar year 2017 basis the stock was changing hands at a EV/EBITDA multiple of 13.4.

However, Citi argued that longer-term valuation metrics were more appropriate given that the synergies from its merger with HPE would only come through fully by April 2021.

So on its base case scenario for HPE Software margins of 32.5%, the shares were in fact trading at a 2021 calendar year EV/EBITDA of 10.6, according to the broker.

Citi set a 2560p target price for the shares.