Investec retains buy on Micro Focus on hopes of cash returns

Micro Focus International delivered better-than-expected interim sales growth and operating cost figures, and net debt was converging towards the company’s target, but the key attraction of the shares lay in its ability to return high volumes of cash in the medium-term, analysts at Investec said.

Sales at the server software provider declined by 2%, which was ahead of guidance for a drop of between 2% and 4%, while operating costs fell from $382.5m to $340.6m, the broker explained.

Furthermore, pro-forma net debt finished the period at 2.62 times earnings before interest, taxes, depreciation and amortisation, close to the target of 2.5 set by management.

First half EBITDA was also already at about 53% of analyst Julian Yates's estimate for the full-year.

Indeed, Yates saw potential for a 5% upgrade to the company’s EBITDA after the strong performance it put in over the first six month of the year.

Nonetheless, it was the “big picture” which drove his positive stance on the stock.

The company had the wherewithal to return 40% of its market cap in cash over the medium-term, he said, thanks to dividends, leveraging the balance sheet and a potential sale of its SUSE unit, “which would put the stock back on a price-to-earnings multiple of 10.”

Yates retained his ‘buy’ recommendation and 1,600p target.