CEO departure scares off Micro Focus investors
The computer software company plunged 14% following the surprise resignation of CEO Stephen Kelly
By market close, shares in Micro Focus had dropped 14.3% or 55.2p to 330.0p, as the FTSE 250 index rose 101.7 points, or 1.1%, to 9,137.1.
In pre-opening deals it was announced that Kelly, who cited personal reasons as his motivation for resigning, will remain with Micro Focus until a new CEO is appointed. The group said trading remains in-line with comments made at August’s interim update.
Reacting to the news, many analysts agreed that Kelly has performed well in his role and that his departure comes as a disappointment. However, the degree to which his resignation will affect the company’s performance divided opinion.
Evolution Securities analyst Roger Phillips maintains that Micro Focus is “structurally attractive with high maintenance and a low risk licence revenue stream.” However, Phillips attributes the company’s strong performance over the last three years to Kelly’s impressive sales force motivation and organisation. Consequently, Evolution suggests that the CEO’s departure will represent a considerable blow to the perception of Micro Focus’s stock. The broker expects short-term falls of 10% and extended underperformance until a new successor is appointed; anticipating poor market performance at least until the publication of interim results in December. Evolution placed its recommendation and target price under review.
Numis Securities analyst David Toms suggests that a change of CEO increases the company’s premium risk, particularly in the context of the considerable integration work Micro Focus faces having just moved into the major new testing market. Whilst Toms sees potential for positive market performance once the testing division is fully integrated, his suggestion is that until a successor is appointed investors are unlikely to be encouraged into the shares. Anticipating the market’s negative reaction to the news, Numis has pulled back its target price by 10% to 420p and downgraded its recommendation to Hold.
A more positive note was struck by FinnCap analysts who suggest that organic slowdown for this period has already been factored into market forecasts and should come as no surprise. Their belief is that Micro Focus retains the advantage of a strong management team capable of guiding the business well until a new CEO is found. They also highlight a resilient business model, a strong balance sheet and cash generation and high margins--all of which should contribute to organic growth through the economic cycle, in FinnCap’s view. Anticipating an additional “uptick in Tech spending over coming months,” FinnCap retains a Buy rating.
