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Micro Focus shares recover as analysts say reaction to revenue warning 'overdone'

Numis lifted its rating on the stock to ‘buy’ from ‘hold’

Micro Focus
Analysts had mixed reaction to the company's trading update

Micro Focus International PLC (LON:MCRO) shares received a much-needed boost on Tuesday after Numis upgraded the stock.

The software company’s shares plummeted on Monday after issuing a revenue warning and announcing the resignation of chief executive Chris Hsu.

READ: Micro Focus shares crash as it cuts revenue guidance, CEO resigns

But Numis lifted its rating on the stock to ‘buy’ from ‘hold’, saying it thinks the reaction to the news was over the top.

“The fall in the Micro Focus share price, while an understandable emotional reaction, looks substantially overdone,” Numis said, leaving its target price at 2,101p.

“The group has no balance sheet issues. Furthermore, SUSE (its German unit), software-as-a-service and maintenance revenues give the business inherent stability, which means that apparently reasonable top-down downside scenarios actually require implausible reductions in licence sales.”

Shares rose 1.5% to 1,027p in late morning trade. 

Micro Focus cut its revenue guidance for the year ending October 31 due to problems stemming from last year’s purchase of Hewlett Packard Enterprise software assets and issues with the implementation of a new IT system that affected the sales team.

Debt not an issue, says Numis

However, it said its net debt position at year-end would be broadly in line with market forecasts and that its cost cutting programme will mitigate the impact of lower revenues on margins.

“With no debt repayment for 3.5 years, and a highly cash generative business model, Micro Focus emphatically has no debt issue,” Numis said.

“We continue to expect (and indeed model) capital returns on top of dividend payouts.”

Other analysts were less optimistic with JP Morgan downgrading the stock and Deutsche Bank and Barclays cutting their target prices.

JP Morgan downgrades Micro Focus

JP Morgan reduced its rating to ‘underweight’ from ‘neutral’ and slashed its target price to 900p from 2,500p.

Stacy Pollard, an analyst at JP Morgan, expects there to be very few positive catalysts to turnaround the shares over the next six to nine months

“The Micro Focus business model is about doing mergers and acquisitions (within the legacy software sector), managing costs and driving margins as well as cash, while maintaining a leverage of c.2.5x over the mid-term,” she said.

“However, the HPE Software deal is clearly below expectations at this point in the process, DSOs (days of sales outstanding) could be high for a while and there could be even higher restructuring charges, putting pressure on FCF (free cash flow), and slowing down the deleveraging process as well.

“Thus, it stands to reason that further M&A is also off the table for longer than expected.”

Barclays and Deutsche Bank cut target price

Barclays repeated an ‘overweight’ rating on the stock but reduced its target price to 1,500p from 2,750p. The bank said despite the challenges, it believes investors' reaction to Monday's trading update was a "step too far" and the company remains a “highly profitable and cash-generative business”.

Deutsche Bank left its rating at ‘hold’ but cut its target price to 780p from 2,800 on the back of the company’s revenue downgrade.

Quick facts: Micro Focus International plc

Price: 1118.6 GBX

LSE:MCRO
Market: LSE
Market Cap: £3.73 billion
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