UBS downgrades Micro Focus on near-term risks

UBS downgraded Micro Focus International to ‘neutral’ from ‘buy’ and cut the price target to 2,350p from 2,420p citing near-term risks.

“Notwithstanding H1's good results and a $400m planned return of value, we see the upside for the shares as limited now,” the bank said.

It highlighted several risks for next year. It pointed out that HPE has to execute a significant ($700m) carve-out process on its software assets to make them ready to pass on to Micro. UBS said there are risks of delays to the deal's closing, due in August 2017, and of disruption to sales execution within HPE Software before or around closing.

“We note that Micro Focus is due to take on the assets at the start of HPE Software's fiscal Q4 which last year accounted for nearly 40% of full year licence sales and profits.”

In addition, the bank argued that Micro Focus’ cash flow is likely to show the effects of significant legal and advisory fees related to the deal ahead of its closing, and restructuring commitments are likely to be a feature thereafter.

Finally, UBS said there are flow-back risks around the deal which will see HPE shareholders own half the combined company on closing.

At 0927 GMT, the shares were down 2.4% to 2,182.69p.