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OoO. In my assessment, the main value gap here is the 'deer digestion' bit. Bambi / Rudolf was swallowed (not entirely successfully) over four years ago. Big digestion progress has been made since the initial stomach upset though. Back-office teams and processes have been consolidated and streamlined. The new single set or core systems seems to be in an advanced stage and close to go-live. Debt has been secured. Cash generation continues. Comments suggest staff morale has stabilised / improved after the initial HP exodous. The last trading update also suggests sales my be returning to forecast trend. If MF can continue that and show that the new systems stack is anything other than a disaster (and the CEO's previous comments suggest they're taking great care to ensure it isn't a mess), then the share price should start to close that value gap. As and when the new sales stack improves cross-channel selling (presumably only once both 'sides' are on board), there's then further upside potential.
As others have pointed out, other short term 'catalysts' could include the restoration of a dividend and the absence of any further intangible asset write-downs. They're more potential drivers of market sentiment though, rather than true value drivers.
Then, as you note, there's also the potential for additional 'digital transformation partner' upside beyond that.
We'll see. I'm not selling any time soon.
That's broadly my expectation also. The two big 'ifs' are that MF can show that its recently improved reported revenues are indeed a return towards previously forecast trend rather than a one-off blip and also that they make a success of their switchover to a single set of group systems (whilst accepting there is bound to be some pain around the latter). On top of a return to previous share price levels, there's potentially additional upside from the emerging (Amazon) evidence that MF has a significant role to play in migrating customers to the cloud and building on data analytics, plus of course their successful work in driving out operational cost . Hopefully in a year's time we'll see revenue and systems stabilised and a return to 'click and repeat' acquisition plans.
Indeed latpulldown. £11+ pre-covid, whilst MF's performance has proved highly resistant to covid impact. £16+ before the August 2019 re-forecast of expected revenue decline, with the recent trading statement consistent with reversing that. And since August 2019: debt has been secured to 2024, operational cost cutting has continued, HP integration has continued, good progress is reported with readying the single set of core systems (rollout early in CY21). And now the Amazon endorsement shows MF has a key role to play in migrating customers to the cloud, keeping their software infrastructure secure and yield better returns from it.
Never mind £5 / £6.50 / £8. The real value gap is the opportunity here, even if for some of us LTHers that may largely be about getting heads above water again.
Sorry, I should have said the CEO made those comments, not the CFO. It's possible the CFO has made similar comments of course.
Re the new systems, PP61 and YNH's comments are in line with my undertstanding. Also, if you Google on "Micro Focus Partners – Transitioning to ‘Stack C’", you should find evidence that MF are readying their sales partners for transition to their new single IT framework. That gives us a good hint that this is not just about 'back office accounting', but should hopefully be enabling customer revenue generation through a smoother process, better integrated product portfolio (hopefully) improved CRM and other benefits of improved go-to-market technology.
They've taken a while in doing this, but the CFO has previously made statements to the effect that he is adamant he would rather the transition was done properly rather than done quickly. I suspect that's partly due to having experienced the "absolute horror show" PP61 refers to when the ex-HP part of the business switched to their new system (not of MF's making).
I suppose different types of investors may have different priorities. However I'll take stabilised sales revenues, continued operational efficiencies and successfully delivered single core set of systems over a restored dividend any day. That's what will really drive value. I agree with you that Q2 progress on these areas will be key though.
Thanks PP. I also 'screwed up' in not spotting the deliberate error :-) The revised calc gives more confidence that the £16 - £20 SPs we saw in Summer 2019 do not seem to be too crazy.
Thanks PP1961. That's helpful and consistent with my view. Of course MF were anyway forecasting a modest decline in sales revenues before the profits warning, to be partially offset by the cost savings they have been driving through. Their business strategy was then to grow through more 'click and repeat' acquisitions of otherwise unloved software assets, where they would repeat the process of stemming sales decline, selling add-ons and taking out cost. The acquisition pipeline has been switched off (presumably) pending getting their single set of core systems sorted, but when/if that is fixed there is then presumably potential for adding value beyond that reflected in the multiple you're using. I guess that's what the exec thought when their incentive plan was based on targets of £30+. A good move back towards the £16/17 level is perhaps all we can hope for in the medium term though.
I don't really care. Obviously more is nice, but I'm not actually much concerned about short term market movements. The real question is what is different about MF (or what we know of it) now, compared to its position before the August 2019 profits warning when the SP was £16/17. My take is 'not much' with the main differences actually being to the positive (debt finance secured to 2024, reportedly good progress on the single core systems project, great resilience shown in the face of C19, successful transition to remote working with the presumption of long-term cost savings to follow that, other operational cost savings delivered). The £16/17+ timing question is far more interesting than the £4 timing question (to us longer term holders at least. You more active traders chaps may have a different view).
Perhaps I am missing something in my assessment. Or perhaps the £16/17 (+) was a ludicrous overvaluation at the time. I'd be interested to know what / why.
I agree patience is key. Hopefully we will also see some short term gains; a £5 SP would be a nice uplift of course. However the real value gap to close is with the £16/£17 SPs which prevailed before the August 2019 profits warning. The recent results suggest revenue levels should be returning to the levels forecast before then, but we'll need at least another half year's results to be confident. There is also the potential for a real confidence boost when their new single set of core IT systems goes live, due in Q1 2021. It would be remarkable if that were painless, but successful delivery of that will be a huge step to completing the integration of HP, should take further operational costs out and should streamline sales processes. That should mean all their demons behind them and a return to the possibility of the "click and repeat" acquisitions that Kevin Loosemore spoke of as part of the driver to get the share price to £32.
I don't mean this as a £32 SP forecast. But if the fundamentals are fixed then there must surely be considerable value beyond £5, given some time.
Last year's annual results were released on Feb 4th. IIRC there was an earnings teleconfernece at the same time.
Yep, that accords with my (very amateur) assessment. If one isolates the (presumably temporary) impact of C19 on MF revenues, the company seems to be doing and delivering much what they promised and their outurn seems consistent with the plans in place before the poor August 2019 trading update. On top of that, there's the potential (but yet undelivered) revenue growth that may come from the strategic review actions. Also that they report now being close to roll-out of their single set of core IT systems (big progress from a year ago), which should reduce costs, streamline the sales process and improve cross-selling across the MF / HP product portfolio.
All that suggests pre August 2019 prices (£16+) should be attainable and that there is considerable potential upside beyond that. I'm in no hurry. I intend to hold for many months at least and possibly years. What am I missing in my analysis here? I'm genuinely interested in others' longer term views.
Thanks for that. He doesn't even say that will involve waiting until 2023, but rather that the growth potential is there if "management can show further progress towards its 2023 targets."
Great to have some positive news at last. Rather than the immediate outlook though, my real interest is longer term. Looking back at what's changed (or not changed) since the August 2019 trading update and ensuing share price plunge(s), MF:
- seem, once isolating the reported C19 impact, to be reporting predicted decline in revenue (as anticipated by their strategy and business model) much as per forecast;
- have shown successful delivery of operational improvements. A year ago that was an intention, now it's actual, proven, successful delivery;
-report good progress in replacing multiple legacy systems, including 'not fit for purpose' legacy HP-side systems, with a single set of core IT systems, with go-live getting close;
-have demonstrated that their teams can operate effectively remotely, which should in turn lead to significant, ongoing travel and real estate savings; and
- have secured debt financing until 2024.
In summary, they seem to have done pretty much what they said they'd do as per their August 2019 updates, turning words into deeds, much of that delivered in the face of C19.
Of course they still have to prove the additional C19 revenue decline is indeed reversible, but that seems very plausible and maybe customers will actually need to make additional 'catch-up' spend.
Also, switch-over to the new set of core IT systems has yet to take place. It would be remarkable if that was a painless exercise. However that would always have been the case and therefore that risk should have been baked into the price ever since the project was announced with the 2018 results. Given MF report 'on track' progress to Q1 2021 transition, the risks attached should now hopefully be significantly lower than at the outset of the project.
Aside from that, what has changed since Aug 2019 when the share value was £17ish? (never mind previous peaks of £27). What was said by MF then and since then seems to have been largely borne out / delivered, yet despite that we're still down @£3.50ish.
Seems to me either MF was crazily over-valued then, or it's crazily under-valued now. What am I missing here?
PS. Please do be gentle with me as a first time poster. I've been a long time lurker and have been invested in MF since 2018, having also topped up at various times since (including recently ?? ). I don't intend to be selling any time soon, miracles aside.