Full-year results from the Human Screen

Just because Micro Focus operates in an unfashionable corner of the software market doesn’t make it a poor investment. 

Highlights

• Adjusted operating profit up 11%
• Return on tangible assets: 48%
• Adjusted net profit of $134m compared to net cash flow of $183 ($165m after net capital expenditure)
• Net debt including approximate capitalised lease obligations of $64m down 12% at $178m, 71% of tangible assets.
• Per-share dividend up 35%
• Shares in issue down 12% mostly due to a return of capital via share buy back

The Human Screen comments:

At the broadest level Micro Focus’ business is easy to understand. It makes and sells software. Trying to determine what kind of software, though, the Human Screen quickly gets lost in the processes and jargon. Its biggest business segment by far sells a version of mainframe programming language COBOL that works on Windows too. Another division migrates software off mainframes onto servers, and in 2009 it bought Borland, the faded software heavyweight, which now produces a software quality and testing suite.

The problem for Micro Focus is COBOL is widely seen as a declining market, because the language is mainly used to maintain legacy systems and integrate them into newer ones. It’s diversification via Borland may be a tacit admission of that, and further evidence comes from revenues, which have flat-lined since 2010.

Operating profits have continued growing though, and provided there remain legacy systems to update and maintain, Micro Focus could still be a hidden champion in a decreasingly competitive market, providing critical software, updates, technical support, and consultancy.

If, as the Human Screen suspects, Micro Focus is a stalwart, the current price may well be a fair one for a mid-sized  software company (enterprise value is about $1bn). It’s unlevered post-tax earnings yield is 9%

More on Micro Focus International

LON:MCRO

HS+ (worth watching for improvement in fundamentals/price)