Deutsche Bank starts Micro Focus at 'buy'

DB noted the company’s strategy is to acquire mature software assets at attractive valuations with significant scope for operational and cost improvement.

It said Micro Focus has refined its approach over the past 10 years and intends to maintain its focus on leveraged inorganic growth for the foreseeable future.

“We believe the current share price applies a conservative discount to the proposed synergies from the HP Software deal and forecast a 13% earnings per share compound annual growth rate FY17-20, normalising to 6% thereafter, supported by a low-mid single digit % dividend yield.”

Deutsche said that following the HP Software deal, the company will have increased group revenues by a factor of 10x in three years. It added that while there is the potential for execution risk, management have executed well in the past.

“We expect volatility around the deal closure given likely forced selling by US funds, but would view this as an attractive buying opportunity.”

Key downside risks include HP Software integration; a faster-than-expected decline in portfolio assets and sustaining a pipeline of attractive M&A. In addition, the bank said raising debt for inorganic growth may become more difficult and expensive.

At 0955 BST, the shares were up 1.3% to 2,585p.