Winners and losers: Micro Focus vs Crest Nicholson

Contrasting reactions to updates from Micro Focus International (MCRO) and Crest Nicholson (CRST) have highlighted the minefield facing investors in today’s uncertain markets.

Only a few weeks ago, Micro Focus appeared to be heading for a quick exit from the FTSE 100 (UKX) Index after a savage profits warning in March triggered by problems with its transformational £6.6 billion deal to buy software assets from Hewlett-Packard Enterprise.

Shares in the Newbury-based group, which has drawn comparisons with Arm Holdings after growing rapidly to become the seventh largest software company in the world, slumped from 2582p in January to 986p by the end of March.

But investors who bought on this dip will be sitting pretty as the company has rebounded spectacularly, with a 27% rise in April alone. This was helped by stakebuilding among US funds and activist investor Elliott.

Now there’s talk in the City about the potential for a “sea change in market sentiment” and a re-rating on the back of today’s encouraging trading update, which has taken shares up another 9% to 1381p.

In contrast, Crest Nicholson shares are down by a quarter so far in 2018 and have underperformed the wider housebuilding sector. It’s a disappointing showing for a stock identified by Barclays at the end of 2017 as one of its top European picks, while UBS also featured Crest in its UBS mid-cap first XI.

But in the wake of today’s update, Peel Hunt has removed its buy recommendation and cut its price target to 520p after the southern focused builder said full-year operating margins are expected to be similar to this year.

The problem for Crest is that the current subdued house price environment has made it difficult to offset build cost inflation running at 3-4% a year.

The company is more positive about its trading performance, with forward sales for 2018 up 11% on a year earlier. However, UBS notes that this still compares with a figure of 15% reported in March.

Source: interactive investor          Past performance is not a guide to future performance

The broker adds that guidance for a full-year operating margin of 18% comes in at the lower end of the previously guided range of 18% to 20%, implying a 7% cut to consensus at the pre-tax level.

UBS has a target price of 615p, which is based on a forecast 2018 price earnings (PE) multiple of 7x, with a dividend yield of 7.2%.

The broker also has a buy recommendation on Micro Focus, with analysts reassured that revenues for the six months to the end of April will be towards the lower end of the company’s guidance for a decline between 9% and 12%.

While there’s still much for the company to do, Numis Securities said the company’s valuation now looked “highly attractive”.

Source: interactive investor        Past performance is not a guide to future performance

It has based its forecasts on December 2019 metrics of 7x enterprise value to earnings, 9x PE and 12% free cash flow yield.

They add: “Whilst the range of H2 outcomes is wide at this stage, the top end of FY guidance could imply a low-single digit H2 decline, which we think would trigger a sea change in market sentiment and a significant rerating.

“We continue to model capital returns from FY19 in addition to dividends.”

While admitting that today’s news is positive, JP Morgan Cazenove remains underweight in the shares due to current volatility and the fact that there are better opportunities elsewhere in the sector. Detailed results are due on July 11.

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