Investors upgrades to Hold from Sell8 Feb 2022 15:02
Micro Focus improves cash generation, but debt issues predominate
Renegotiation of debt and strong cash generation has enabled management to improve the dividend
February 8, 2022
By Arthur Sants
Cash conversion ratio falls because of working capital
Revenue forecast to avert decline next year
Software and consultancy business Micro Focus (MCRO) is still fighting to get to grips with its disastrous purchase of Hewlett Packard's enterprise software business by stripping out costs. This leaves it in an interesting spot to handle interest rate rises even as it maintains healthy dividends and strong cash generation, and even with a massive debt pile – an unholy balancing act.
MCRO:LSE
Micro Focus International PLC
1mth
Today change
-12.49%Price (GBP)
400.00
Adjusted cash profits (Ebitda) were down 12 per cent to £1bn. However, the statutory operating loss narrowed appreciably due to a big reduction in depreciation, amortisation and exceptional item costs. Excluding these exceptional charges, adjusted free cash flow was $292mn (£216mn). This was less than half of last year due to one-off tax payments and working capital outflows, some of which were driven by timing differences in payment of receivables.
Cash conversion was down from 113 per cent to 87.1 per cent. However, management is expecting an adjusted free cash flow run rate of approximately $500m on an annual basis through 2023, with a flat revenue trajectory.
The biggest concern is the $4.2bn net debt burden (excluding lease liabilities). Micro Focus has managed to extend the average maturity of the debt pile to 3.6 years from 2.7 years, and has used this breathing space to increase the final dividend to 20.3¢ from 15.5¢ last year.
House broker Numis has forecast net debt to fall to $3.59bn by 2023 and the expects free-cash-flow yield to rise to an impressive 15.3 per cent by then. This is progress of sorts, but the company may find it harder to meet its debt commitments given the probable trajectory of interest rates. However, with the shares trading at a 36 per cent discount to net assets and improved cash generation, we move (gingerly) to hold.
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