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This growing small-cap could be about to unlock value for investors

Small-cap software company Microgen (LSE: MCGN) delivered decent full-year results today and announced a strategy that looks set to unlock value for investors. Read on to find out more…

The firm owns the Aptitude Software brand, aimed at helping company chief financial officers streamline finance operations, address regulatory requirements and deliver strategic insights to their bosses “in a range of industries.” It also has the Microgen Financial Systems brand, which targets the global wealth management sector and application management services requirements.

Unlocking value and opportunity

The fastest-growing division is Aptitude Software, and today the firm announced plans to demerge the Microgen Financial Systems business, which I think is a move that could unlock value for shareholders from here. Indeed, rebooted entrepreneurial drive could see each independent enterprise thrive from where they are now.

In the strategic update announcement, the directors explain that historically both businesses benefitted from back-office administration synergies within the company. But because Aptitude Software has been growing so well, the benefits of it being in the wider company structure have reduced because the finance, legal and human resources functions have been embedded into each business unit “to provide greater and more tailored support for their growth.” 

If approved by shareholders, the demerger is planned for 2019. The directors reckon the newly independent Microgen Financial Systems will prosper under its dedicated management team. Meanwhile, the company plans to change its name in April from Microgen to Aptitude Software Group to “reflect the new focus of the group.” I think exciting times could be ahead for shareholders because simplification and focus is almost always a good thing in business, and this move could enhance investor total returns going forward.

Good trading and outlook

The full-year results report reveals overall revenue grew 12% during 2018 and half of that advance was driven by organic business. Adjusted earnings per share moved 8% higher and the directors signalled their confidence in the outlook by pushing up the full-year dividend by 6%.

The outlook for both divisions is positive. Aptitude Software delivered around 51% of 2018’s operating profit and Microgen Financial Systems, 49%. With the firm’s earnings spread almost equally, I think it’s a great time to free each division as independent companies.

The stock has been moving up through most of March in anticipation of today’s results and, at the current share price close to 452p, the forward-looking earnings multiple sits just below 22. The anticipated dividend yield is a little under 1.8%.

That’s a full-looking valuation, but the dividend has advanced around 65% over the past five years, reflecting the firm’s decent rate of growth. I think there could be a lot more to come in terms of total investor returns and I rate the shares as very interesting. Microgen strikes me as being one to keep a close eye on.

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Kevin Godbold has no position in any share mentioned.