Micro Focus
Investors in software companies have been counting their blessings during the Covid-19 chaos. Many developers have sailed through the pandemic with their valuations greatly enhanced (Simon Duke writes).
The stock market has attached dizzy premiums to Zoom, Netflix and other providers that help us to work and stay amused while stuck at home. Little wonder that the Dow Jones software index has risen by nearly a third since January.
Micro Focus, the former FTSE 100 software group, should be feeling the glow surrounding its US-listed brethren. The company helps to prolong the life of the software used by banks, retailers and others to run their back-office systems. Indeed, this new mood of corporate austerity would appear tailor-made for Micro Focus. Won’t customers want to eke out more from their existing software rather than splashing out on pricey upgrades?
It hasn’t panned out that way. Micro Focus has been on a downward glide since striking a marquee merger with Hewlett Packard’s software division in 2017, a deal that brought into its fold the rump of Autonomy, the former FTSE 100 software developer. And yesterday the company disappointed once again.
Its revenues tumbled by 12 per cent to $1.45 billion in its fiscal first half to the end of April and it admitted that some clients had been slow to renew maintenance contracts and had deferred new spending. To make matters worse, Micro Focus plunged to a $1 billion statutory loss after writing $922 million off the value of its portfolio of software businesses.
Its share price duly fell by almost 86p, or 19.6 per cent, to 352¾p. Since the start of the year, its market valuation has fallen by two thirds to £1.3 billion.
The company’s woes stem from its failure to digest HP’s assets. Micro Focus was formed in 1976 and was listed for a second time in 2005 when Kevin Loosemore, the seasoned software executive, joined as non-executive chairman. Under his watch, the company embarked on a spree of progressively larger takeovers, which it funded through the debt markets.
It proved adept at squeezing cash from its declining assets, mainly through cost-cutting. When Mr Loosemore agreed the HP merger, he hubristically described the process of swallowing up smaller developers as “click and repeat”.
It didn’t take long for the alliance to unravel. Micro Focus bungled the integration of HP’s IT systems so badly that it was unable to bill some of its leading clients for six months. It suffered a wave of resignations in its American sales team after a drop in orders. Mr Loosemore, 61, quit in February, leaving Stephen Murdoch, 54, to call the shots.
Micro Focus has ballast to see it through the present turmoil. The company recently refinanced its $4.3 billion debts, pushing out the maturity of its loans, and can count on recurring revenues for 70 per cent of its turnover. Sensibly, Mr Murdoch axed the final dividend for last year and this year’s interim payment.
However, the giant writedowns should give prospective investors pause for thought. On one hand, they are meaningless, being non-cash charges; on another level, though, they are an admission that Micro Focus does not expect to claw back the value it has destroyed over the past three years. They call into question the company’s raison d’être as a buyer of ageing software assets.
Micro Focus’s share price has fallen 87 per cent from its 2017 peak and it is trading 80 per cent below the levels of last February, when this column advised investors to avoid the stock. It may be tempting to try to seek value at these bombed-out levels, but given its recent history, calling the bottom is a fool’s errand.
Advice Avoid
Why Shares are trading at 12-year lows, but Micro Focus is cheap for good reason
Iomart
While the need for robust home-working technology has been pushed forward by Covid-19, for Iomart the shift towards cloud computing and virtual work stations was already its main target (Greig Cameron writes).
Indeed, last month Angus MacSween, its chief executive and founder, called the IT services provider “pandemic-proof” after trading continued calmly through a turbulent second quarter.
Iomart, founded in Glasgow in 1998 and listed on Aim in 2000, provides a range of IT services to small businesses. It has a network of its own data centres in Britain, where the bulk of its customer base is, as well as a presence in the Americas, the Middle East, Asia, Australia and Europe.
It recently reported a 9 per cent rise in revenue to £113 million in the 12 months to the end of March, with pre-tax profit rising 4 per cent to £16.8 million. The dividend was reduced, from 7.46p to 6.53p, as the company operates on a formula where it can pay a maximum of 40 per cent of adjusted profit before tax.
About 85 per cent of its revenue is classed as recurring and no single customer makes up more than 2 per cent of its turnover — but in a sector where customers are notoriously sticky, organic growth can be hard to come by.
However, Mr MacSween and his team have a solid track record of snapping up smaller British-based consultancies. The opportunities for further consolidation are plentiful, with Iomart typically receiving new proposals each week.
Mr MacSween also wants the group to start competing for bigger deals and the company’s sales function has been overhauled over the past year. He has been encouraged by recent wins worth more than seven figures and said: “If we want to move the dial we have to be getting bigger contracts.”
The shares were at 405p in February before falling below 230p in March. There has been a partial recovery since, but at 339½p there could be more to come. Analysts at Panmure Gordon are cautious, with a target price of 348p and concerns about how resilient its customer base will be over the coming months.
Advice Hold
Why Generates cash, pays a dividend and has eye on rivals
