Wednesday newspaper share tips: Tesco, Micro Focus

A barrage of new initiatives from Tesco has helped steady the ship, but it will be some time before they yield fatter margins and the return of the dividend, the Financial Times’s Lex column said.

The grocer’s recent launch of a new own-brand product range - mimicking those of the discounters such as Aldi and Lidl, including on pricing – appeared to have the desired effect.

Tesco’s sales in the 12 weeks to 27 February registered the smallest decline since the end of 2013.

In turn, analysts are turning more positive, helping to lift the share price by a third this year, level-pegging with peer Wm Morrison.

Nonetheless, operating margins were still below 1.0% in the first half of the current year, versus the over 5.0% seen in 2011, with not even the biggest optimists expecting a return to past levels.

Management is right to cut prices, sell assets, slash overheads and slim-down its product ranges, the tipster added.

However, there is less margin than at Morrison for improving its performance by shrinking its footprint because most of its establishments are leased.

“Share prices gains with a commensurate recovery in profits makes for a heady valuation.”

The company will have to deliver when it presents its full-year results on 13 April, Lex concluded.

Micro Focus pulled off another coup with the acquisition of US outfit Serena Software from its private equity owners, a transaction which has been on the drawing board since 2008, The Times’s Tempus said.

The American outfit’s systems allow large corporations such as banks and insurance companies to run old, legacy computer systems.

Acquisition targets such as Serena do not need large investment, enjoy margins of around 50% and throw off large amounts of cash.

Revenues are very reliable too.

Whereas giving cash back to investors would provide it with approximately a 6.0% return, the purchase of Serena would increase its combined profits by 10.0% or more, before any synergies

Indeed, a £158m placing to help part-fund the deal went through the market without difficulty at £14.55.

“Micro Focus is among the more reliable ways to invest in the UK technology sector, not prone to some of the heart-lurching price movements elsewhere, and the graph bears this out. […] worth tucking away.”