MCRO – what a sorry mess

MCRO (Micro Focus) published its results today, sending the shares down 17% to 821p. Revenues are down 7.3. They started a “comprehensive Strategic & Operational Review” in August 2019, which I take as meaning that they’ve made a right bodge of things.

Most of the narrative in their RNS suggests that they bit off more than they could chew. The bought SUSE, and then sold it at a loss. The bought HPE Software, and had trouble integrating it. I’m guessing that it was also a bit of a pup.

Our goal is to deliver incremental improvements in revenue trajectory

Yeah, whatever. Use of management-speak does not fill me with confidence.

alongside a structured and disciplined transition

As opposed to the clusterfsck that they have delivered in the past, presumbably. Their whole report reads like they had just puked up a MBA dictionary.

Let’s turn to the Outlook statement. They expect revenue declines in the range 6-8%, and a reduction in net debt.

I’m getting bored reading, but they made a loss of $34m on continuing operations (not good!), which excludes an exceptional gain on their disposal of SUSE.

The RNS goes on and on and on, and I’m not going to bother reading the rest of it. Although I will note that their free cashflow went down to $576m from $755m, a decline of 24%.

Let’s actually turn to Stockopedia, which I think can give a much better overview of these things. In 2013 they reported revenues of $412m and operating profit of $159m. In 2018, the corresponding figures were $4754m and $376m. Their operating margins declines from 39% to 8%.

So we see here a picture of aggressive expansion. That’s a tenfold increase in revenue, which is tricky to achieve organically. The explosive growth coupled with declining margins suggests that there was a lot of management hubris. Even if you hadn’t read the RNS statement, you could have easily have guessed that they bought into a lot of stuff at inflated prices that subsequently went sour.

Look at the ROCE figures, too! From 149% in 2013 to a feeble 2.6% in 2018. Atrocious.

I dabbled in MCRO in the past, back in 2012 by the looks. I bought in at 452p. I didn’t make a note of my sell price, but I would have been certain to have made a profit. MCRO was very much a different business back then. They had their COBOL offering (and still do), and I dare say that it was a cash cow that they could have milked from then until doomsday.

MCRO is on a P/FCF of 3.4, so you never know, this could be a turnaround. I’ll make a note to follow up in a year’s time.

In my actual portfolio, I disposed of CARD (Card Factory) and RDSA (Shell), and bought MGAM (Morgan Advanced Materials) in their place. MGAM passed Stockopedia’s Screen Of Screens, and has a StockRank of 92. Broker forecasts have been creeping up, too.

CARD has been a disaster for me. It has a Momentum Score of 2, a lot of debt, and the share price has been trending downward since its precipitous fall in January. The weak director’s purchase was bearish to me. So I decided that it was as well to throw in the towel on this one, even though I held it for less than a year. I don’t want to be holding it when it updates in April. I sold at a loss of 56%. Not nice.

Stay safe out there.

MCRO: 821p.

Update 04-Feb-2020: Just checking out the BBSs, I see one poster notes that the chairman sold a huge chunk of shares in Jul 2019 at 1777p (total value: £1.2m). There we go, then.

Update 05-Feb-2020: Just had a look at Stockopedia again, and noticed the substantial amount of debt of the company. I’d therefore be bearish overall, and would not be reassured by the P.FCF of 3.4 that I noted earlier.


About mcturra2000

Computer programmer living in Scotland.
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