The shares of £1.8 billion IT infrastructure business Micro Focus (MCRO) have the potential to surge more than 150% over the coming months, according to Stifel technology analyst George O’Connor.
Trading around 4% higher today at 544p, O’Connor has a price target on the stock of £14.06, using his own ‘blended’ valuation model that uses earnings, peer comparison, discounted cash flow, sum-of-the-parts and free cash flow yield analysis.
BRIDGING THE TECH GAP
Micro Focus bills itself as a company that helps customers innovate faster with lower risk. Its applications help companies integrate modern technologies with their existing IT stack, bridging the gap between old and new IT innovation trends.
‘Micro Focus is a core supplier to enterprises focusing on the heavy lifting of digital transformation through Enterprise DevOps, Hybrid IT Management, Predictive Analytics and Security, and Risk & Governance,’ says O’Connor.
‘This is proven by the company’s AWS and Microsoft relationships, and the latest partnership with TCS,’ or Tata Consulting Services.
The company’s suite of roughly 300 products are currently provided to circa 40,000 customers around the globe.
The Stifel analyst says the Micro Focus product range has undergone a ‘radical overhaul’, now using machine learning in real-time that helps users to make meaningful decisions based on thorough user and process trend analysis.
This adds up to making dynamic suggestions for process improvements and automation opportunities, adds O’Connor.
AMBITION ROADMAP
Micro Focus published a three-year ambition approximately a year ago to deliver stable revenues and adjusted earnings before interest, tax, depreciation and amortisation margins towards mid-40%. The plan would also see the company generating at least $700 million of free cash flow annually.
‘As we look at the post-Covid-19 world, migration and associated digital transformation is accelerating and Micro Focus is well positioned,’ believes O’Connor.
The company has also been identified as a potential takeover target given its lowly rating. Current estimates for the year to 30 October 2022 imply a price to earnings multiple of less than five.
‘We continue to question whether we’ll see any interest from strategic buyers or private equity at this discounted price,’ commented Megabuyte analyst Lee Prout in February.
Micro Focus is due to publish interim results on 1 July.
