Micro Focus International (MCRO)

[ZipserSir]

Yes, I know it is not a HYP candidate, with a current yield just over 3%, but having been buffeted by Carrillion, Provident, Capita et al, I am looking for reassurance from a share that is in the FTSE 100, seems to have a decent history of maintaining and growing its dividend, and so far as I know, has few gainsayers. Should I buy for my HYP or do you have a different view???

[PinkDalek]

Earlier discussion from January linked below, should that be of any assistance:

Subject: MicroFocus - a buying opportunity?

[monabri]

Yes, I know it is not a HYP candidate, with a current yield just over 3%, but having been buffeted by Carrillion, Provident, Capita et al, I am looking for reassurance from a share that is in the FTSE 100, seems to have a decent history of maintaining and growing its dividend, and so far as I know, has few gainsayers. Should I buy for my HYP or do you have a different view???

I did on 8th Jan 18. The historical Free Cash Flow per share seems ok - but MCRO completed a significant £6.8 billion takeover of HP's Enterprise Business at the end of last year - so there is a new risk going forward.

Here's a snippet from the DT.

http://www.telegraph.co.uk/technology/2 ... s-7bn-hpe/


Note - dividends in dollars, FCFPS figures in Sterling (hence an additional margin of safety - assuming that the pound doesn't crash in value versus the dollar). Data sourced from MorningStar.

[moorfield]

Yes, I know it is not a HYP candidate, with a current yield just over 3%, but having been buffeted by Carrillion, Provident, Capita et al, I am looking for reassurance from a share that is in the FTSE 100, seems to have a decent history of maintaining and growing its dividend, and so far as I know, has few gainsayers. Should I buy for my HYP or do you have a different view???

Firstly I'd be looking for a yield above 4.2% (*) for any new addition or top up, but I've also argued here previously that lower yielders can be added or topped up into a portfolio if it's overall yield remains above that and higher yielding candidates have been discounted first. If MCRO helps you sleep at night, bring it on ...

I know little about MCRO, but I hold Sage (SGE) in the technology sector, and it's been delivering the beans for me for years.



(*) that being the City Of London IT yield currently which I use to benchmark against HYP

[idpickering]

I get where moorfield is coming from, after all, some of us hold the likes of Unilever, and I agree with looking to bring on a higher yielding share too. This outfit is not for me, and even in the OP the author says;

Yes, I know it is not a HYP candidate, with a current yield just over 3%,...

There are higher yielding shares out there to buy instead.

Ian.

[MoVert]

I have held Computacentre (CCC) in that sector for some time. Increasing dividend history https://www.stockopedia.com/share-prices/computacenter-LON:CCC/dividends/ They seem very inclined to return surplus cash to shareholders once in a while too.

[Wizard]

I hold IBM in the technology sector, you may want to consider them. Yield c.3.8%, paid in US$ but that is no different to Micro Focus. You seem to be favouring a bigger play given recent problems with smaller companies (me too!), IBM's market cap is about 10x that of Micro Focus. Eighteen year track record of increasing dividends (source: http://www.dividend.com/dividend-stocks ... -ibm-corp/). Free Cash flow well above dividends being paid for the last five years (source: http://quotes.wsj.com/IBM/financials/annual/cash-flow).

The potential issue is the US withholding tax, but this can be reduced by completing a W-8BEN form and is zero if you hold in a SIPP, as I do.

Terry.

[cshfool]

As an old value hound there are a few things not to like with MicroFocus, -ve tangible book value, -ve net current assets, seem to be vast amounts of "goodwill" on the book (called water in a previous era) via the growth by takeover approach. I don't have any ROCE values - does anyone else? Gearing looks a little high for my taste (87%) ish, and to be honest, yield looks a bit low really at 3.6% forward(2.9% trailing). If one uses the Norm EPS (81p 2017) the trailing PE of 26 seems about twice too many for comfort, or use IFRS3 of 51.5p EPS, gives a trailing PE of 42 at £21.18 per share, which is a speculators darling rating. If the 2018 forecast growth (70%+?) doesn't materialise bang on, or preferably above target, and is only say 35%- still a great result-, then these type of shares, ie the exciting world of strong anticipated EPS growth, tend to take a severe kicking to capital values.

However on the plus side, small div growing like topsy, and FCF looks good as indicated, but not enough margin of safety for me, however FWIW I wouldn't like it even if it was paying much higher yield because of the balance sheet, and PE ratio with embedded forecast growth risk.

csh

[Gengulphus]

Note - dividends in dollars, FCFPS figures in Sterling (hence an additional margin of safety - assuming that the pound doesn't crash in value versus the dollar). ...

It doesn't work that simply - free cash flow is essentially a net figure, i.e. various cash inflows minus various cash outflows. Changes in exchange rates can affect the cash inflows and outflows differently if their currency distributions are different, and that can lead to either an increase or a decrease in the net figure.

I found the following useful quote on the subject in the 2017 annual report:

"During the year to 30 April 2017, 62.4% of our revenues were contracted in US dollars, 21.2% in Euros, 4.5% in Sterling, 3.6% in Yen and 8.3% in other currencies. In comparison, 50.7% of our costs are US dollar denominated, 12.2% in Sterling, 19.6% in Euros, 1.7% in Yen and 15.8% in other currencies.

This weighting of revenue and costs means that if the US$: Euro or US$: Yen exchange rates move during the year, the revenue impact is greater than the cost impact, whilst if US$: Sterling rate moves during the year the cost impact exceeds the revenue impact. Consequently, actual US$ EBITDA can be impacted by significant movements in US$ to Euro, Yen and Sterling exchange rates."

I haven't really managed to reconcile all of the figures in your post and in the annual report, probably simply because I haven't spent very long trying, but if for instance the cash outflows that contribute to free cash flow are 75% of the cash inflows that contribute to it, and if the currency distribution of those outflows and inflows match those of the costs and revenues respectively, then one gets the following figures per $100m of free cash flow:

Cash inflows: $400m, of which $18m in sterling and $382m in dollars/euros/yen/other currencies
Cash outflows: $300m, of which $36.6m in sterling and $263.4m in dollars/euros/yen/other currencies
Free cash flow = $400m-$300m = £100m

Now imagine the pound crashes vs the dollar, while the dollars/euros/yen/other currencies all remain steady relative to each other (so the pound also crashes against all of those currencies) - that way, it's fair to describe what's happen as the pound crashing and not the dollar rising sharply. And to keep the arithmetic especially simple both to perform and to check, as well as to make the effect reasonably large and solely due to that exchange rate change, imagine that it's a really major crash, by a factor of 2, and that all the cash inflows and outflows remain the same in their designated currencies. The situation changes to:

Cash inflows: $391m, of which $9m in sterling and $382m in dollars/euros/yen/other currencies
Cash outflows: $281.7m, of which $18.3m in sterling and $263.4m in dollars/euros/yen/other currencies
Free cash flow = $391m-$281.7m = $109.3m

So if the dollar-declared dividend remains the same, the dividend cover figure increases by a factor of 1.093, or equivalently the company can raise the dividend by 9.3% without sacrificing dividend cover. Or from the UK-based HYPer's point of view, the sterling dividend rises 100% with that increase in dividend cover by free cash flow, or by 118.6% while the dividend cover by free cash flow remains the same. In short, they have nothing to fear from that huge sterling crash as regards the dividend they receive from Micro Focus (plenty to fear from the sterling crash's other likely effects, certainly, but their investment in Micro Focus will help to mitigate those other effects rather than exacerbating them).

Smaller, more likely sterling crashes will have correspondingly smaller effects in the same direction, so also not a cause for concern about the Micro Focus investment. It's actually sharp rises in sterling's value relative to the dollar/etc that should be such a cause for concern - they're effectively 'negative crashes' and have similar-but-opposite-direction effects...

None of that should be regarded as firm conclusions - it's too dependent on the assumptions I made about the breakdown of free cash flow into inflows and outflows, about the currency distribution of each and about nothing else changing. But it does indicate what can happen, and probably will unless those assumptions are wrong in a major way.

Gengulphus

[monabri]

It just shows that being a FTSE100 company doesn't provide any stability... down over 50% today. Add to the growing list ....

[jackdaww]

i have avoided microfocus , especially after the big HP aquisition.

i have dipped into sage after years of watching and waiting.

computacenter i bought into 3 years ago - not a HYP pick but TR has been good.

[moorfield]

Boom, another HYP pick hits the rocks!

TBH I struggle to understand how MCRO ended up in peoples HYPs in the first place.

Yes it has a cute looking dividend history stretching all the way back to 2006 on its website, but can anyone help with the obvious question:

When was it yielding more than the FTSE100 and how many other higher yielding and larger market cap candidates were also available at the time?

[Pipsmum]

This one stings because Numis had just given it a buy rating. The temptation is to add to it at the bottom, if indeed this is anywhere near the bottom, and lessen the price by a margin by spreading the muck a bit hoping for a return bounce.

[Arborbridge]

TBH I struggle to understand how MCRO ended up in peoples HYPs in the first place.

Yes it has a cute looking dividend history stretching all the way back to 2006 on its website, but can anyone help with the obvious question:

When was it yielding more than the FTSE100 and how many other higher yielding and larger market cap candidates were also available at the time?

I believe it did around 2011? Well, anyway, it did at one time, but it never impinged upon my searches, for whatever reason.

I'm not sure how this shows that this negates idea of buying the biggest companies for safety reasons. I would have thought one cannot pick an example and draw a general conclusion. For one thing, it hasn't gone bust - we await developments.
Secondly, we must remind ourselves that we are managing a portfolio, not a single company. One would need to show how a portfolio of tiddlers come out for "bankrupts" compared with a portfolio of mega-companies before drawing conclusions in either direction.

[idpickering]

TBH I struggle to understand how MCRO ended up in peoples HYPs in the first place.

I agree moorfield. I said further up this thread that I didn't consider this to be a HYP share, and am glad that I followed my instincts on this one and didn't buy any. Good luck to those that did though.

Ian.

[idpickering]

This one stings because Numis had just given it a buy rating. The temptation is to add to it at the bottom, if indeed this is anywhere near the bottom, and lessen the price by a margin by spreading the muck a bit hoping for a return bounce.

Careful pipsmum. Is it worth the risk? IMHO no, there are better shares out there.

Ian.

[idpickering]

I would let the dust settle before making any decisions. There will likely be more negative stuff to emerge and time to buy in once the bloodletting abates.

Even then, if at all. DYOR.

Ian.

[Pipsmum]

Too cross at yet another bad choice that appeared led by sense when made. The existing few were in at far too high an SP to recover after today, so I furiously sold two other slots at a meagre £4 profit in order to swoop in to buy 70 at the other side of the bottom as it began to slide upwards again. Only missing the absolute bottom because the password jammed twice first. Then waited until a stop loss was on it, watched the SP go up to 1100 but then down again. Cut and ran three hours later with the same 70 at 1020. Walked off with £78 and converted all the remaining 20 to less than half the ave price they were, so they stand a chance of recovery now. The SP might well go up much further but I don't care because there's still some in. I'm keeping the cash for a calm move.

I could not be a day trader.... it's too fast.

[Alaric]

I would let the dust settle before making any decisions. .

Autonomy seems to have a curse. It was bad for Hewlitt Packard and now it seems bad for Micro Focus.

[idpickering]

Too cross at yet another bad choice that appeared led by sense when made. The existing few were in at far too high an SP to recover after today, so I furiously sold two other slots at a meagre £4 profit in order to swoop in to buy 70 at the other side of the bottom as it began to slide upwards again. Only missing the absolute bottom because the password jammed twice first. Then waited until a stop loss was on it, watched the SP go up to 1100 but then down again. Cut and ran three hours later with the same 70 at 1020. Walked off with £78 and converted all the remaining 20 to less than half the ave price they were, so they stand a chance of recovery now. The SP might well go up much further but I don't care because there's still some in. I'm keeping the cash for a calm move.

I could not be a day trader.... it's too fast.

I enjoyed reading your post Pipsmum, and it made me smile. Reading it reminded me of why I HYP in the first place, that is, hopefully, that it is, and should be, a 'hands off and leave well alone strategy'. I couldn't be doing with investing in the way you describe above. I'm not clever enough, nor good enough, to be an out and out trader. No ta, HYPing for me thanks. Good luck for your future investing though.

Ian.