Micro Focus is bigger and better

Six weeks before we get official confirmation, Micro Focus International has repeated guidance for full-year results. They'll be significantly higher than last year following the acquisition of US software rival The Attachmate Group Inc (TAG) in November, and this integration story continues to promise much.

As already flagged at December's interims, and then again last month, Micro expects combined pro-forma full-year revenue- Micro's year ending 30 April and TAG's ending 31 March - of about $1.33 billion, and underlying adjusted cash profit of $500 million.

"The board is pleased to reconfirm that the group expects to report revenues and underlying adjusted EBITDA comfortably in line with this guidance on a constant currency basis," said Micro on Tuesday. Numis Securities thinks that means a 2% beat, giving profit of $510 million at constant currency, or $500 million at actual rates.

Reported results will include TAG's numbers from 20 November 2014 to 30 April 2015, and will mean the group reports revenue of about $835 million and profit of $345 million. Again, that's ahead of the $790 million and $316 million expected by Numis.

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There's been progress on net debt, too. Between January and 30 April, it fell from $1.5 billion to $1.4 billion, reflecting good cash collection in the final quarter. That's $228 million better than Numis had anticipated when the TAG deal was struck, and better than last month's upgraded estimates.

"All the early indications here are good, and although the shares have performed well post deal, we think that there is still more to go for. 14.6x CY16 EV:NOPAT [enterprise value/net operating profit after tax], 7.1% FCF [free cash flow] yield" says analyst David Toms.

"MCRO generated over $1/share in the 5.3 months from 20/11/14 to 30/4/15 and is over a year ahead of our original expectations. We think this makes it increasingly likely that we will see a November-16 capital return."

We were excited by the TAG deal when it was announced in September, noting that the odds on a successful integration looked good. Since then, Micro shares are up by almost a quarter. According to Toms, the net debt beat in isolation is worth 21p/share and the profit outperformance could be another 40p.

The company, which also made it into our Summer "Sizzler" Portfolio based on its ability to consistently beat the market between May and October, generates much better margins than TAG, too. Forecasts may need adjusting higher if management can work some of that magic on the American business.

"We think the opportunity is much bigger than near-term performance - if management demonstrate that they can successfully apply the MCRO operating model to a much larger business, then there is significant long term strategic potential," adds Toms.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.