market folly

We're posting up notes from the recent Sohn London investment conference.  Next up is Andrew Dickson of Albert Bridge Capital who presented a long of Micro Focus (LON:MCRO).


Andrew Dickson's Presentation at Sohn London Conference

Micro Focus is a FTSE 100 company that has an acquisitive business model. It buys mature legacy software businesses, particularly in the enterprise application software area. These are ‘melting ice cube’ businesses but the Micro Focus team have figured out a way to put them in the freezer to make them last longer. Their model is the antithesis of traditional tech investing. They find businesses that have stopped growing. They are not looking for businesses that are taking share or accelerating growth. Once they have bought a software company they try to change the culture away from growth to ‘trying to stay relevant’.

Micro Focus was founded in 1976 and listed in 2005. Until last year the stock was up 25x since 2005. In 2017 they made their biggest acquisition buying Hewlett Packard’s software businesses for $8.8bn. Digesting the HP businesses has been difficult so far. In January and March 2018 there were two profit warnings. Micro focus’s shares sold off from $20 per share to $0.9 in three days and the CEO left. Albert Bridge added to their position at that time. Since then, the company has been getting back on track but the shares are still down 40% year to date.

Dickson believes that Micro Focus’s long experience of turning around businesses will allow them to successfully integrate the HP businesses over time. In the end, they will do what they have done in the past and take businesses with 20% EBITDA margins up to 45%.

Short interest is quite high. Dickson thinks the shorts misunderstand the business. They point to the lack of top line growth when the model is all about slowing the pace of revenue deterioration. Some analysts have suggested that they need more acquisitions. The shorts also point out that the CFO is leaving after less than a year in post. Dickson thinks he is only leaving to work with a previous boss.

Currently, Micro Focus is reasonably priced at PE 9.5x. In July 2018 it announced it would sell one of its highest growth businesses, Suse, for $2.5bn. There will be a special dividend for shareholders early next year. In six months the sale will be completed and the company will still be able to produce $2 of EPS. By then it will be on a PE 7.5x, 15% FCF yield.


Be sure to check out the rest of the presentations from the Sohn London investment conference.