Deutsche Bank blighted blue chip software firm Micro Focus International PLC (LON:MCRO) today, downgrading its rating to ‘hold’ from ‘buy’ on valuation grounds.
The German lender left its target price for the FTSE 100 listed group at 2,800p, with the stock trading at 2,583p, down 2.7% or 72p on Friday’s close.
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In a note to clients, Deutsche Bank’s analysts said: “With limited upside potential to our price target, we believe the risk/ reward is now rather more balanced and downgrade to Hold.”
They forecast Micro Focus reporting 7% single digit earnings per share (EPS) growth after full year 2020 - that is once the synergies from its transformational HP Enterprise software acquisition have largely been delivered - along with around a 4% dividend yield.
The analysts believe that a valuation of around 15 times full year 2018 EPS - in line with mature software and IT services peers - is roughly fair given a total shareholder return of about 11%, offset by “the potential for further execution risk, lack of clarity around further future M&A and a lack of meaningful organic growth potential."
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They concluded that applying that formula to their full year 2020 EPS estimate, and discounting by 8%, results in its 2,880p target price, which is only marginally ahead of the current share price.