Numis sees 'clear buying opportunity' in Micro Focus

Stock broker Numis highlighted a buying opportunity at Micro Focus after the shares fell 18% since its results on 8 January.

Analyst David Toms at Numis said he understand why the market was disappointed with a slightly weak operating performance at the "heritage" business, "but we think the quantum of move is overdone" even allowing for roughly 4% share price impact from US dollar weakness.

Furthermore, Toms suggested the market is overlooking the incremental upside from lower US tax and therefore around $370m more cash by 2020.

"Our decade-long view has been that a key attraction of MCRO is the long-term stickiness and cash generative nature of its products. This is sometimes belied by short-term licence volatility which can drive even greater volatility in the shares and thus an opportunity, such as now, for longer-term investors to make supernormal returns," he said.

Unlike some in the market, the analysts said he was confident in management's guidance of revenue falling 2-4% in the twelve months to October 2018.

Perceiving that achievability of guidance is a key factor in investor confidence after revenues fell 8% in the six month to last October, he believes that "as the market gains confidence in this, and thus that the model remains effective, the shares will regain their former rating".

To achieve overall guidance, Micro Focus could deliver a licence decline of 4-12%, against a three-year pro-forma average of -8%.

Allowing for management's qualitative steer of a better second half than first in 2018, Toms forecasts revenue will improve from the 8% decline in the second half of 2017 to circa -6% in the first half and circa -2% in the second, which "would show an encouraging trendline" and get the market back on side.