Interactive Investor

Amazon deal has Micro Focus International shares rallying hard

3rd March 2021 15:57

Graeme Evans from interactive investor


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If this partnership goes well, the shares could have further to go, the City thinks.  

The rollercoaster journey for former blue-chip income stock Micro Focus International (LSE:MCRO) took shares 17% higher today as investors cheered a major pact with Amazon Web Services (AWS).

The strategic agreement with the US giant will see Micro Focus technology used in helping customers to move their workloads from mainframe applications to the cloud.

Amazon (NASDAQ:AMZN) has subscribed for up to 15.9 million Micro Focus shares at 446.6p a share, the vesting of which will depend on the level of software revenues generated by AWS for Micro Focus.

Shares rose 77p to 515p and are now 142% higher than their multi-year low in November. They had been above 2,500p in 2017, but were undone by an acquisition spree that culminated in the ill-fated purchase of the software segment of Hewlett-Packard Enterprise for $8.8 billion.

The company is now a third of a way through its three-year turnaround plan, with today's agreement another positive landmark in the recovery after the reinstatement of dividends in last month's annual results.

The payment of 15.5 cents a share due on 15 April contrasts with the 100.84 cents awarded in 2018, when annual compound shareholder returns of 29.3% in the 12 years since its 2005 IPO were enough to propel Micro Focus into the FTSE 100 index.

The company, whose digital transformation software and services enable clients to bridge the gap between existing and emerging technologies, posted a 10% fall in revenues to $3 billion in the annual results covering the year to 31 October.

While its application modernisation & connectivity division accounted for about 16% of the 2020 revenues, chief executive Stephen Murdoch said the Amazon deal offered the potential to drive new customer adoption and growth for an extended period.

The scale of the warrants granted to AWS amount to 4.4% of equity at last night's share price, which Numis Securities sees as a positive indication on the revenues potential.

The broker has a price target of 650p and believes the momentum and scale of AWS meant the agreement could eventually be a meaningful contributor to the group's revenue ambitions.

Numis analyst Will Wallis added: “We are not changing our forecasts, and we don't expect any material immediate effect on revenues, but we view this agreement as very helpful in raising the credibility of the path of longer-term revenue improvement.”

Goldman Sachs, which has a 600p price target, said the success of the partnership posed upside risks to the City's revenue forecasts.

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