Micro Focus is the classic techie stock for investors who don’t really like techie stocks. Lurking at the very unglamorous end of the software spectrum, it creates programmes to patch and augment legacy systems first installed 20 or 30 years ago. The business is a bit boring. The revenues are sticky and recurring.
Micro has prospered in recent years not by developing whizzy new products or chasing sales but by buying and integrating other similarly mature businesses. The deals have got progressively bigger. And the proposed HPE Software acquisition is a positive gorilla.
Kevin Loosemore, executive chairman, is confident he can replicate previous successes. “It’s click and repeat, basically,” he says. Certainly, it’s been hard to fault previous purchases, where he has nailed efficiencies no one else seems to have been able to winkle out.
The 15 per cent surge in the Micro share price yesterday suggests his fans have few doubts. Analysts are pencilling in $660 million of synergies over three years if Mr Loosemore can lift HPE’s margins to the same level as Micro’s. The business is, however, gearing up to clinch this deal while simultaneously delivering a $400 million bung to existing shareholders. Debt will initially rise to 3.3 times Ebitda profits before coming down speedily as the cash — in theory — floods in. There’s no doubting the attraction of Micro if Mr Loosemore succeeds. It could be making Ebitda profits of more than $1.8 billion by 2020, compared with $663 million today. Even allowing for the heavy dilution — HPE shareholders are getting over 50 per cent of the combined business in newly issued shares — that’s value creating.
The shares trade on about 18 times this year’s expected earnings but the p/e multiple drops to about 12 times 2020 earnings, if those efficiencies are delivered. Not dear for a tech company. Weighed against this is the size and complexity of the deal, the lengthy time frame and the pedigree of some of the purchased assets. Some of them were contained in one of the most regretted deals in recent technology history — Hewlett-Packard’s acquisition of Autonomy.
Governance sticklers may also be concerned about the dominance of Mr Loosemore in the boardroom. He’s betting the farm and his reputation with this one and there’s no independent chairman to exercise restraint or advise caution.
MY ADVICE Sell
WHY The best acquisition-led strategies can backfire with very big deals
Dixons Carphone
Not many shares were clobbered harder in the aftermath of the Brexit vote than Dixons Carphone. They tumbled 34 per cent in a matter of days. Even now, with investor sentiment on the mend, they are well below their pre-referendum level.
Yesterday’s trading statement should calm the doubters a bit more. Underlying sales growth of 4 per cent in the 13 weeks to July 30 was strong. Better, the company saw absolutely no difference in the intensity of demand before and after the vote. How different from that other great modern-day shock, the Lehmans collapse in 2008, when Dixons sales dived by 30 per cent on the weekend after.
The company is gearing up for a bumper Black Friday, an important date in the retail calendar and one particularly suited to Dixons. It has the scale and clout to order tailor-made products from manufacturers.
If consumer confidence droops, Dixons is exposed but not as much as you might think. It has a large temporary workforce which can be trimmed. Much stock is ordered on an optional basis, meaning it can be cancelled without cost. The weaker pound will have an affect, pushing up the buying price of imported products. But Dixons enjoys the tailwind of deflation. Stuff still gets cheaper. Chief executive Seb James’s rule of thumb is that a £10 million fall in sales feeds through into a £1 million drop in profits.
The shares at 389p trade on 13 times expected current year profits and yield 2.8 per cent.
MY ADVICE Buy
WHY Shares inexpensive while company is less exposed to downturn than feared
Zoopla
Analysts tweaked their full-year forecasts a little higher yesterday after Zoopla said that its Ebitda profits would be at the top end of the £69 million to £76 million range.
The property portal is enjoying strong growth in both its core business and its newly acquired uSwitch energy platform.
Investor confidence in the group is improving as rival OnTheMarket, the estate agent-backed disruptor, appears to struggle. Zoopla is likely to emerge as a strong No 2 in a relatively comfortable duopoly. Rightmove continues to dominate.
The uSwitch acquisition is looking well timed amid evidence that millions more of us will be using energy-switching portals in the years ahead. Zoopla is expected to give more details of its long-term thinking at a capital markets day next Thursday.
The shares have bounced back strongly since the post-referendum sell-off. They trade on about 27 times expected profits this year, dropping to 23 times for 2017. That’s not cheap, even for such a high-growth stock.
The property market may be resilient but transaction volumes — the factor important to the survival and prosperity of estate agents —
are low.
MY ADVICE Hold
WHY Good growth tempered by property downturn fears
And finally ...
Frontier Developments, the AIM-listed computer games developer, reported an “encouraging” 50,000 pre-orders and sales of test versions of its Planet Coaster game, which enables players to build, ride and share virtual theme-park rollercoasters. The launch date is November 17. It hopes for a repeat of its hit RollerCoaster Tycoon 3. Sales in the year to May declined 6 per cent to £21.4 million. Operating profits fell 21 per cent to £1.24 million. The cash pile shrank by £1.9 million to £8.6 million. The shares rose by 4½p to 174p.
