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Deutsche Bank downgrades Micro Focus 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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Deutsche Bank’s analysts said: “With limited upside potential to our price target, we believe the risk/ reward is now rather more balanced"

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.

READ: Micro Focus shares jump as newly acquired HPE software firm reports quarterly profit growth

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."

READ: Micro Focus expects to deliver medium term benefits from HPE merger

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.

View full MCRO profile View Profile

Micro Focus Timeline

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February 05 2018
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February 01 2018
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January 29 2018

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