Cash in on Computacenter's recovery

Despite tough trading in Germany and France, Computacenter continues to eke out growth. Strip out currency headwinds and its first-half sales climbed over 4 per cent while its pre-tax profits - adjusted for one-off items - rose 7.5 per cent. Those gains validate Computacenter's shift away from supply chain work, which is highly dependent on customer spending, towards more reliable services.

The strategy helped the group increase its constant-currency first-half services revenue by 5 per cent and grow the number of customer accounts that contribute over £1m to its annual gross margin from 81 to 92. And those gains should continue as Computacenter is currently developing tools, systems and processes for next-generation services. It is also expanding geographically - for example, by building a new service desk in Montpellier, France.

Investors may not be wowed by single-digit growth, but Computacenter's exposure to the spread of connected devices - known as 'the Internet of Things' - and big data should accelerate its gains. As people use more mobile devices and seek to use them in more places, Computacenter's data centres and network hardware will likely be needed to store and share information and demand should rise for its IT support and services. "If there's more reason to be connected, that's good for us," says chief executive Mike Norris.

That might be a tad speculative for skeptics, but anyone of that bent can look to Computacenter's thriving UK business for more concrete prospects. Adjusted operating profit (accounting for 63 per cent of profits) rose nearly a quarter last half, reflecting strong demand for its professional and managed services as clients upgraded their software to Windows 7 or 8 and Office 2010. It also signed a five-year contract with Network Rail to deploy over 27,000 employee PCs and laptops, upgrade software and provide IT support at close to 1,800 signal boxes, train stations and offices across the UK. Computacenter's domestic supply chain sales also soared about 18 per cent, which reflected higher client investment levels.

Its German business also made gains last half, winning a managed services contract - its largest since late 2011 - that encompasses a major local auto company's 150,000 users. It also flexed its muscles by shifting the communications of a chemical company to a virtualised platform, which involved transferring data from 30,000 users in 20 countries over the course of five weekends. True, its sales and operating profits in Germany fell due to a weak showing from its supply chain segment. But 40 per cent of that divisional decline stemmed from a low-margin software licence that was sold last year and didn't repeat.

The core of Computacenter's troubles continues to be its French operations - although first-half sales there rose 15 per cent, the segment lost a few significant services contracts last year and incurred £9m in one-off restructuring charges that conspired to widen its operating loss. Computacenter is considering resizing its client base in France to maximise profitability. It also plans to lower costs through headcount reductions and has already installed new management.

Given the strong performance in the UK, improvements starting to come through in Germany and the potential for self-help in France, Computacenter's shares offer keen value. Strip out cash of 39p a share and they trade at a mere 13 times forecast earnings for the next 12 months - a discount to Sage's rating of 17 and the international peer group average of 15. They also pay a decent yield of 3 per cent, rising to 3.2 per cent next year. And Computacenter hasn't been afraid to leverage its strong cash generation and net cash position - it bought back £75m in shares last year.