Micro Focus share price drop is an opportunity, Barclays says

Barclays believes recent share price weakness in Micro Focus is an opportunity.

The day before the company had posted an approximately 15% fall in its second half licenses and earnings before interest, taxes, depreciation and amortisation were wide off the mark by about 2.5%.

Investors were also wary ahead of its acquisition of Hewlett Packard Enterprises's software arm, a recent miss on licenses by HPE Software itself, they explained.

As an aside, that EBITDA miss was the direct result of an entire team leaving its host connectivity business.

Nonetheless, flat guidance for the first six months of 2018 meant the business was "stable".

Operating expenditures at HPE Software were also faling more rapidly than expected, suggesting the 'self-help' investment case was largely on track, they said.

So changing hands at about 10 times EBITDA, which was near the company's pre-deal announcement levels, and at 10 times their 2020 proforma estimates for earnings per share, the previous session's share price weakness was an "opportunity".

In terms of possible milestones going forward, analysts James Goodman, Gerardus Vos and Sven Merkt pointed to the company's Capital Markets Day on 7 September which should "reinvigorate" the share price.

HPE's third quarter numbers were also expected at around the same time, they added.

"The share price suggests either Micro Focus's business has materially weakened or that the transaction is no longer an opportunity. We continue to believe some disruption is part of such a deal, and that value will be created."

The broker reiterated an 'overweight' recommendation on the stock and 2600p target price.