Market Report: Bargain hunters drive gains in Micro Focus

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The Independent Online

Micro Focus rallied last night as investors bought in on the view that, following months of sluggish performance, the software group was now primed to book gains in the long term.

The stock gained more than 5 per cent or 19.2p to 385.2p after the analysts at Barclays Capital highlighted the valuation gap that had opened up between Micro Focus, which trades on multiples of 9 times forward earnings, and its software sector peers, which trade on multiples of around 13 times. With the departure of the "well regarded" finance chief Nick Bray and the disappointing update on revenue growth in August now in the past, the broker said the shares could begin to mount a turnaround as the new management team settled in and the market revisits the investment case.

Besides highlighting the opportunities in the main business of mainframe modernisation – in other words, upgrading mainframe computers for companies – Barclays also weighed in on the testing market which Micro Focus entered via acquisitions last year. "All our conversations so far with industry sources have revealed that there is growing demand in this area and that there is very little competition," the broker explained, initiating coverage on the stock with an "overweight" stance and 500p target price.

overall, the FTSE 100 was 25.06 points behind at 5,573.42 while the FTSE 250 edged up by 23.65 points to 10,562.65. Technical factors were in focus after the benchmark's short-term trend or the 50-day moving average overtook the long-term trend mapped by the 200-day moving average, boding well for future movements.

In terms of monthly movements, the FTSE 100 is up nearly 7 per cent since the beginning of September, equalling the performance seen in July, and putting it on track for its best monthly performance since July 2009.

A number of miners featured on the leader board, with the likes of Kazakhmys and Antofagasta rising against a backdrop of mostly quiet commodity markets. The two, knocked by a UBS warning on the prospect of weaker copper prices on Friday, led the bigger players, adding 21p to 1,442p and 14p to 1,195p respectively. BHP Billiton at 2,010p, up 0.5p, Vedanta Resources at 2,292p, up 11p, and Rio Tinto at 3,703.5p, up 8p, were also firm at the end of last night's session.

In the wider sector, gold prices once again touched the $1,300 per ounce mark at one point in the session, and triggered profit taking around African Barrick Gold. The stock was the weakest of the blue chips, easing 18p to 578.5p.

Back on the upside, and the Premier Inn-owner Whitbread gained 6p to 1,628p after Credit Suisse weighed in on the outlook for hotel groups. The broker said it expected Whitbread's upcoming half-yearly figures to show progress on margins, supporting its above consensus estimates for the group. Turning to sector peer Intercontinental Hotels, 1p lower 1,133p, the broker said it expected margins on earnings before interest to swell to a new peak in 2011.

Elsewhere, the software group Autonomy rose by 29p to 1,800p after Barclays adopted a positive view. "In the short term, we see the potential to significantly upwardly revise estimates as the company is due to announce a significant acquisition in the coming months," the broker said, pointing to the company's convertible bond issued in March.

"Such a transaction historically has resulted in significant upgrades to earnings," Barclays explained, initiating coverage with an "overweight" stance and a 2,200p target.

The broker was more cautious on sector peer Sage, which nonetheless rallied 8.1p to 266.3p, claiming pole position on the blue-chip index. Barclays initiated coverage with an "equal-weight" rating, but the speculators were more interested in late rumours of takeover interest. Though thin on detail, the chatter suggested that Sage could soon be the subject of an offer more than 400p per share, a significant premium to last night's closing price.

Housing stocks were generally lower on a Hometrack report showing that house prices had declined the most in 18 months in September. In response, Redrow was 2.5p behind at 127p and Berkeley fell to 818.5p, down 11.5p, but Barratt Developments was broadly unchanged, down 0.1p at 104p. In the wider sector, Bovis Homes was 1.3p behind at 386.5p, while Bellway dipped by 6.5p to 593.5p.

Jupiter Fund Management was strong, gaining 12.9p to 251.9p, as Credit Suisse highlighted the opportunity in the UK retail savings market, arguing that, despite the savings ratio returning to its long-run trend, "there remains an accumulated shortfall in savings that needs to be filled".

"Given that interest rates remain low and appear likely to remain so for the foreseeable future, and investment in housing is unlikely to recover substantially, we see a good opportunity for the traditional retail asset managers to attract assets for saving," the broker said, adopting an "outperform" view. "Jupiter has the largest market share in the UK retail assets of the listed asset managers, which makes it well-positioned to benefit from any closure in the saving gap."