Micro Focus crashes again as Amigo Holdings dives 48%
It took Micro Focus two months to halve in value, but Amigo did it in just one morning. Here's how.
29th August 2019 12:47
by Graeme Evans from interactive investor
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It took Micro Focus two months to halve in value, but Amigo did it in just one morning. Here's how.
In the three years since little-known software company Micro Focus International (LSE:MCRO) joined the FTSE 100 index, life has been anything but dull for its income chasing followers.
And so it proved again today as a revenues warning meant the global infrastructure software business surrendered a third of its value and the hard-fought gains that had made it one of the top flight's best performers in the first half of 2019.
Shares in Micro Focus, which is now in danger of relegation in next month's FTSE 100 index reshuffle, are back near to where they were in early 2018 following a previous slide in investor confidence triggered by worries over the integration of Hewlett-Packard Enterprise.
That deal for £6.6 billion was unveiled within weeks of Micro Focus joining the FTSE 100, catapulting the company into the spotlight as one of just two top flight tech stocks.
Its shares were above 2,700p in November 2017, fell below 1,000p in March 2018, then bounced to 2,174p in July this year but now trade at just 1,026p after today's 34% plunge. As investors did well buying on the previous dip, today's slide will alert many to the recovery potential of a company whose shares trade on a projected price/earnings (PE) multiple of just 7.9 times.
That's a lowly valuation for a global software business, particularly given its record of annual compound shareholder returns of 29.3% in the 12 years since its IPO in 2005. Dividends per share have grown from 6 cents in 2006 to 100.84 cents in 2018, yielding about 5.5%.
Source: TradingView Past performance is not a guide to future performance
Our friends at Stockopedia recently named Micro Focus as one of the top stocks on its dividend checklist for income investors, based on meeting various criteria for reasonable yields and dividends that appear to be sustainable, well managed and forecast to grow further.
Micro Focus certainly pumps out impressive levels of cash, with free cash flow doubling to $429.9 million in the six months to April 30. Debt is high at $3.8 billion, but Micro Focus is comfortable with this at 2.7 times adjusted earnings due to strong levels of cash generation.
The biggest concern for investors, however, appears to be the deterioration in economic conditions as customers become more cautious and take longer to reach decisions.
This prompted today's review of constant currency revenue guidance from a range of between minus 4% and minus 6% in the year to October 31, to between minus 6% and 8%. The company, whose technology helps major companies to extend the life of mature software assets, previously reported a decline of 7.1% for the 12 months ending 31 October 2018.
CEO Stephen Murdoch described the recent trading performance as disappointing, adding that he would accelerate a strategic review in order to see where operations can be enhanced.
The ongoing integration of Hewlett-Packard Enterprise will be a key focus, given that Micro Focus said in last month's interim results that the complexities of the process continue to require “detailed attention and substantial programme planning and execution”.
Meanwhile, the economic climate was also blamed for a sharp slide in the share price of sub-prime lender Amigo Holdings (LSE:AMGO) in the FTSE 250 index. The stock, which joined the stock market at 275p last year, slumped almost 50% to 75p as Amigo management reset expectations for the current financial year, including through a more cautious approach to lending.
Source: TradingView Past performance is not a guide to future performance
Customer numbers and revenues in the first quarter still increased by 17.3% and 13.7% respectively, but a rise in impairments and increased investment pegged the growth in adjusted profits to 6.4% at £20.4 million. The company, which specialises in guarantor loans, said its response to the evolving regulatory and economic environment meant new customer lending would be prioritised over re-lending to existing customers.
CEO Hamish Paton said:
"Amigo is both a responsible and profitable lender. We are focused on our future returns and building a sustainable business for the long term."
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