How do you respond when you’ve seen a FTSE 100 blue-chip such as software giant Micro Focus International (LSE: MCRO) jump 15% in a day? You take a calm look at the opportunity to see if it still holds.
Takeover trouble
Investors are celebrating as the group’s management says it’s now getting on top of its integration of the Hewlett Packard Enterprise, acquired in a reverse takeover in September 2017. Today’s unaudited preliminaries for the 18 months to 31 October show the rate of revenue decline has been easing and should further improve in 2019.
Investors are also set to enjoy a windfall as management pledged to return the proceeds of the $2.5bn sale of its SUSE business and keep its share buyback scheme going. Micro Focus is bouncing back nicely from its profit warning last March.
Cashing in
It still has some way to go, with group pro-former revenue falling 5.3% in the 12 months to end-October, although guidance suggested 6-9%. Revenue from its product portfolio, excluding SUSE, slipped 7.1% on a pro-forma constant currency basis to $3.7bn, although margins jumped from 33.3% to 38.4% year-on-year.
CEO Stephen Murdoch hailed a solid financial performance and said the Micro Focus operating model should deliver substantial cash returns to shareholders, with total dividends per share of 151.26 cents, plus $400m of share buy-backs, with SUSE proceeds to come.
Shareholder rewards
Murdoch expects revenue declines to moderate further as the company looks “to build a more dynamic environment where execution is faster, operations simpler and people more accountable.” My Foolish colleague GA Chester recently suggested that today’s results would be a catalyst for improved investor sentiment, and they certainly are.
This £7bn company trades at a forward valuation of just 9.7 times earnings, while the forecast yield is a generous 5.4% with cover of two. Earnings per share are expected to start growing again, by 9% next year, and 10% the year after. Operating margins are currently 32.6%. It looks a buy to me. Maybe let the share piece calm down a bit first.
In a fix
DIY chain operator Kingfisher (LSE: KGF) has also had a rough ride, with the share price down 34% in the last year alone. Its stock now trades at 230p, having lost nearly half its value since spiking at 438p almost five years ago.
Kingfisher’s main businesses are B&Q, Screwfix and French chains Castorama and Brico Depot. It has been hit by falling sales, particularly at flagship brand B&Q and in France, although Screwfix and the group’s German business have fared better.
These are tough times for retailers and not just in the UK, as Europe flirts with recession. Accordingly, Kingfisher has quit Russia, Spain and Portugal. RBC Capital Markets recently downgraded the stock due to the unsupportive UK outlook, which provides 50% of its revenues, and structural issues in France.
B&Q it
Global housing markets are slowing due to high prices and recession fears, and this could reduce demand for DIY products. The £4.9bn business trades at just 8.8 times forecast earnings, so there could be a buying opportunity here.
Kingfisher’s forecast yield is 5%, with cover of 2.2%, and City analysts foresee EPS growth of 16% and 10% in the next two years. Maybe things aren’t as screwy as they seem. Especially with the company returning £600m in capital to investors.
