As companies embrace new technology, and monitor their operations in increasing detail, they are using and producing vast amounts of data. Many are opting to outsource their computing and data storage needs, saving themselves cost and hassle and gaining access to specialist services such as cybersecurity. That trend - which remains ongoing - helped the software and computer services sector deliver a healthy 8 per cent return in 2014.
Perhaps the best example is infrastructure and IT services group Computacenter (CCC), a recent buy tip (619p, 4 Sep 2014). Last year it won a five-year contract with Network Rail to deploy over 27,000 computers and upgrade and maintain 1,800 signal boxes, stations and offices. Moreover, the restructuring of its troubled French operations appears to be paying off: strip out currency movements and third-quarter sales rose 5 per cent.
Exposure to the connected trends of 'big data' and the 'internet of things' also remains lucrative; that helped drive a 15 per cent rise in data centre provider Telecity's (TCY) first-half operating profit, for instance. Furthermore, Telecity's management estimates that organic full-year sales - excluding currency movements - rose by a tenth. However, investors remain concerned that the group is investing too much: it continues to boost capacity but sells less than three-quarters of its available power to customers.
Software companies, meanwhile, are trumpeting subscription-based products and hosted 'cloud' services in a bid to smooth their revenues, which tend to be both volatile and unpredictable. Accounting and payroll-software titan Sage (SGE), for example, grew its software subscription sales by 28 per cent in the year to end-September, increasing the value of its subscriber base to £220m. That also lifted the proportion of sales from organic recurring revenue to 73 per cent of the total. Its gains partly stemmed from its new small-business cloud product, Sage One, which more than doubled its paid subscriptions to 86,000.
Conversely, it was an arduous year for Aveva (AVV), whose software is used by energy and engineering companies to try out designs. The plunging oil price drove many of its customers to retrench, which halved its first-half operating profit and sent its shares down 40 per cent for the year. A strong pound and sanctions against Russia's energy industry remain worrisome, too, and management is running out of costs to cut. Aveva's challenges underpin our recent sell tip (1,413p, 4 Dec 2014).
Surging data demand promises to supercharge IT service providers, while a focus on recurring business bodes well for software companies. Specific markets, though - such as energy and financial services - won't improve overnight, but another strong year for the sector as a whole looks likely.
| Company | Share price (p) | Market value (£m) | PE ratio | Dividend yield (%) | 1-year performance | Last IC View |
| Aveva Group | 1,377 | 881 | 18.6 | 2.0 | -40.6 | Sell, 1,413p, 4 Dec 2014 |
| Computacenter | 655 | 911 | 14.3 | 2.8 | 0.9 | Buy, 619p, 4 Sep 2014 |
| Fidessa Group | 2,425 | 926 | 29.0 | 1.6 | -2.1 | Sell, 2,380p, 7 Nov 2014 |
| Micro Focus Int'l | 1,066 | 2,313 | 15.3 | 2.6 | 40.2 | Buy, 1,114p, 10 Dec 2014 |
| Sage Group | 472 | 5,084 | 20.8 | 2.6 | 14.3 | Hold, 427p, 3 Dec 2014 |
| Telecity Group | 849 | 1,721 | 21.9 | 1.4 | 10.9 | Hold, 751p, 4 Aug 2014 |
Favourites
Micro Focus International (MCRO), which modernises companies' computers and IT systems, is widely lauded for its steady growth and chunky returns to shareholders. Paying down debt from its recent acquisition of US peer Attachmate could dampen returns in the short-term, but shareholders still look set to profit further down the line. We stand by our buy tip (793p, 29 Aug 2013).
Outsiders
Trading software group Fidessa (FDSA) has had to endure years of consolidation, closures and restructuring among its financial services customers. Sales and profit growth remains modest, user acquisition has stalled and the group remains heavily exposed to currency movements. Although Fidessa's key markets are starting to improve, and its new offerings are gaining traction, the broader business remains grounded. The shares also trade at a lofty 28 times broker Panmure Gordon's forecast earnings for 2015. We reiterate our sell tip (2,300p, 5 Jun 2014).
