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Why you should have a closer look at Micro Focus shares

Micro Focus International (MCRO.L), the business software provider, is in focus after more share buying by Derek Stuart of Artemis.

Why you should have a closer look at Micro Focus shares

This week I'm looking at business software provider Micro Focus International (MCRO.L), which joined Citywire Top Stocks® this month after a rally in the share price and stake-building by Derek Stuart, manager of the Artemis UK Special Situations fund. The fund now owns 4% of the £750 million company.

Since I made the video, Tom Virden, a non-executive director who joined the company in January, has bought 5,440 shares at 561.8p each. Last month executive chairman Kevin Loosemore, who I talk about in the video, bought and sold shares to increase his stake to 186,000 shares, or 0.11% of the company.

Veteran stock picker Derek Stuart is fond of saying he likes companies that engage in a bit of self-help.

This week I am looking at Micro Focus International, the business software provider that recently popped into the top 10 holdings of Stuart's Artemis UK Special Situations fund.

The past few years have been painful for the Berkshire-based company, which lost its way after making a couple of big acquisitions in 2009.

The company’s chairman Kevin Loosemore ousted the former chief executive last year after he had just 18 months in the job following a string of profit warnings caused by a loss of contracts, particularly in America.

Loosemore, who has been with Micro Focus since it joined the stock market seven years ago, has had to administer a dose of tough medicine to start turning the company round.

This has helped its share price shoot back up nearly 50% in the past year.

Takeover speculation has also been a factor in this revival after venture capitalists circled and considered making a bid for the company last spring.

With the support of institutional investors like Artemis, however, Loosemore fended off the pin-striped predators with a promise to restructure and revive Micro Focus.

Telling someone how to improve their business is always easier said than done but Loosemore’s diagnosis of Micro Focus does look surprisingly simple.

To restore the finances he gave the company’s three international divisions greater autonomy and incentivised their management to grow profits, not just sales. Hardly rocket science is it?

Secondly, he cut jobs and reorganised the company’s product development and sales teams, so that they actually communicated with each other.

The company has also started offering its software in a new, online web store. Amazing an IT company can miss that one!

Thirdly, Loosemore has looked after shareholders so that they would support him as he turned round the business. By buying back the company’s shares and raising the dividend, Loosemore showed he cared about investor returns. To ice the cake for investors, Micro Focus borrowed money to pay them a special dividend of around £90 million, or 45p per share, at the start of the year.

It’s always strange to see a business do this. You kind of think a company should have better things to do than spend its money on buying back shares and paying interest on unnecessary overdrafts. However, being shareholder focused is a good thing and besides Micro Focus has the cash flow to support it.

The company’s half-year results before Christmas showed Micro Focus was back on track with a recovery in software licence fees and profit margins restored to an impressive 40%. In a recent trading statement the company expressed confidence it could repeat the 8.5% growth in first half earnings in the second half of the year as well.

While some investors have taken profits, Stuart has built up his stake in Micro Focus, buying 2 million more shares earlier this year to give Artemis UK Special Situations a 4% stake in the company, which is valued at £740 million.

In a recent interview with Citywire, Stuart conceded the company’s growth prospects were not amazing but with big profit margins and strong cash flow, he expected the shares to continue to advance. 

With the company saying it has more do and most analysts rating the stock a buy, there may be well more to come. Stuart has a great track record at picking stocks. The shares are currently trading at 458p, which represents around 10 times next year’s forecast earnings, which is not as cheap as they were but still looks good value compared to its sector.

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