LONDON (ShareCast) - Merchant Securities has initiated coverage of Micro Focus International with a 'buy' rating and 530p target price, saying that the group knows 'how to put cash to good work'.

The legacy software specialist's full-year results were broadly in line with expectations, the broker says, with revenues coming in at $435m ($436m forecast) and adjusted earnings before interest, tax, depreciation (EBITDA) and amortisation of $180m ($178m forecast).

However, basic earnings per share of 65.8 cents were some 7% above Merchant's 61.3 cents estimate due to a lower-than-expected interest charge and lower share count due to its ongoing buy-back programme.

Analyst Roger Phillips said that, importantly, cash generation was "excellent" at 108% of EBITDA, "underpinning ongoing cash returns to shareholders". Furthermore, he highlights the bullish guidance for near-term cash generation - returns through buy-backs or one-offs of 1.5 times EBITDA over two years - and the rebasing of the dividend.

"Management have not been tied to growth targets, which we think sensible. In our view the cash generation (and efficient return) supports the valuation.

"We would ultimately not be surprised by a return of private equity interest, but view the stock as a strong defensive in a tricky market," Phillips said.

By 11:24 on Thursday, shares were trading 4.98% higher at 474.5p.

BC

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