Micro Focus International (LSE: MCRO) had been a bit of a software superstar over a decade and more.
But the wheels came off in March this year, when it was looking like the firm’s acquisition of HP Enterprise’s Software division could be proving to be something of a poisoned chalice. The integration was not going as well as hoped, and the departure of new chief executive Chris Hu didn’t help — the share price crashed by nearly 50% on the day of the resulting trading update.
Though the shares have recovered somewhat since then, they’re still down 45% over the past 12 months. Is Micro Focus a screaming buy now?
Well, the HP integration certainly looks like it was bungled, with the incompatibility between two cultures and two technical systems causing all manner of upheaval — including staff departures and higher-than-expected costs.
Modest valuation
But even after such turmoil, analysts are only expecting a flat year for earnings, and if that’s the worst the calamity can do then I think I’m seeing a company that is fundamentally sound. Even with no EPS growth, the shares are still on a forward P/E multiple of only 10.
Dividends are not expected to be adversely affected either, with almost twice-covered 5.6% yields currently predicted for this year and next. And the firm’s interim figures in July looked pretty decent to me.
Net debt at the halfway point was high at $4.3bn, but the targeted net debt-to-adjusted EBITDA multiple of 2.7 times doesn’t look too tough.
The other thing for me is that I’m not expecting to hear further bad news. Once we learn that the HP integration problems are receding, I think we could see an upwards share price correction.
Rebased bargain?
I’ve always liked Associated British Foods (LSE: ABF), seeing its wide portfolio of brands as providing very safe long-term prospects. With Twinings, Ovaltine, Jordans, Ryvita, Silver Spoon to its name, and the star that is Primark, how could you go wrong? To me, it has always looked close to Unilever in its brand portfolio and its global reach.
With hindsight, I think it’s fair to say that the shares had become a little overvalued — perhaps a great company but not, as Warren Buffett likes to see, such a good price.
But with the share price having slumped by 31% over the past 12 months, are we looking at an attractive valuation now? I think so.
Results for 2017 put ABF shares on a P/E of a shade under 25, and that was for a stock with a dividend yield of only 1.3%. Quality does command a premium, but with a long-term FTSE 100 average P/E of closer to 14 (for a dividend yield of around 3.5%), I do think the market’s downwards re-rating of the shares was probably correct.
Better value
Today we’re looking at forward P/E multiples of around 17 to 18, with the share price fall having pushed the dividend yield up around 2%.
This week’s pre-close update suggests the year has seen strong profits from Primark (once again), Grocery, Agriculture and Ingredients divisions. And this is a company that operates on a net cash basis, so there are no debt worries.
The shares are not screamingly cheap, but I do now think we’re looking at a great company at a good price.
