Stock to watch: Micro Focus International PLC – ADR (NYSE: MFGP)

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Micro Focus International PLC – ADR (NYSE: MFGP) stock has fallen over 7.7% on July 11th, 2018 leading to a fall of over 53% in this year to date.

Maintenance has been hurt by lower licensing. The professional services income fell 27% which is a managed decline in the services income. The revenue decline in MFPP was 8.7% hurt by the transition issues. But this decline was expected and the group focused on costs leading to an adjusted EBITDA margin improvement of 4.2%.  However, the group continued to have high DSOs forecasts. The group declared a dividends of $0.5833 and a second interim dividend of an 18 month period.

The deferred revenue haircut was hurt by over 1.1 points in this half which would unwind in the second half over the full year. Americas region has seen more pressure than other geographies due to transitionary issues.  However, SUSE delivered a 16.1% revenue growth this year while EBITDA rose 22% driven by the segment sale to Swedish buyout group EQT Partners EQT for 2.535 billion. The group sees this move generating value creation for shareholders which generated 7.9 times revenue, 26.7 times adjusted operating profit. The group’s investments in SUSE has finally realized a major amount of value for shareholders. The deal is expected to finish by early 2019. The group continue to deleverage after the deal wherein they de-levered from 3.1 at the end of October 2017 to 3 at the end of April. The group is targeting leverage of 2.7 times, midway through next fiscal year and without the SUSE transactions and that’s the organic deleveraging. Micro Focus is a highly cash generative business. Before the working capital movement, the group generated $672 million of operating cash flow during the half, which as reported, is a 122% increase year-on-year reflecting the new size and scale of the business.

Given the huge cash the group is well positioned in the market, and aims for stabilization of revenue decline, as they see a reduction of the rate of decline as they go to 2020.

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