In today’s digital-focused world, having decent IT infrastructure, a slick website and efficient data storage matters. Not to mention good cyber security, the value of which is growing given the increasing prevalence of data hacks. But in a year when economic turmoil has put undue pressure on many of the UK’s businesses, technology spending has taken a back seat. Computer services companies have struggled as a result.
Computacenter (CCC) and Aveva (AVV) are prime examples of this phenomenon; both had to stomach a slide in constant-currency turnover in 2016. Computacenter blamed falling UK-based sales on home customers procrastinating ahead of the EU referendum. But strong performances in France and Germany helped reduce the rate of that decline. With major political votes in these two countries in 2017, it will be interesting to see whether continental customers also reduce tech investment in uncertain times.
Embattled oil and gas companies also sidelined tech spending last year and Aveva felt the repercussions. The same could not be said for Fidessa (FDSA), though. Its customers are mainly banks, insurers and asset managers and, although trading has hardly been plain sailing for these companies, pressure from regulators to boost efficiency and adhere to new guidelines kept IT spending high.
The challenges experienced by FTSE 350 listed groups have not deterred smaller players, and a surge of new professional services businesses entering the market has ramped up competition. Aggressive growth is the way some companies have dealt with this. Softcat (SCT), which only joined the stock market in November 2015, has rapidly bulked up its operation in order to face down rivals. Acquisitions and a 20 per cent increase in headcount helped to boost sales, although management attributed new customer wins to its superior service.
Micro Focus (MCRO) is also continuing on its acquisition streak and recently announced a merger with Hewlett Packard Enterprise's (US:HPE) non-core software assets. The proposed deal, worth $8.8bn (£7.2bn), represents the largest purchase by a UK company of a foreign technology company.
Elsewhere, cyber security concerns fuelled demand at Sophos (SOPH). Digitalisation in shopping, banking and socialising has created a playground for cyber hackers and the need for better online security is sure to continue. This demand wasn’t enough for NCC (NCC), though: a profit warning in October saw it crash out of this list.
| Price (p) | Market value (£m) | PE (x) | Yield (%) | 1-year change (%) | Last IC view | |
| Aveva Group | 1,928 | 1,233 | 31.5 | 2.2 | 38.8 | Hold, 1784p, 08 Nov 2016 |
| Computacenter | 798 | 979 | 15.1 | 2.8 | -2.5 | Buy, 753p, 30 Aug 2016 |
| Fidessa | 2,268 | 875 | 28 | 1.8 | 22.9 | Hold, 2548p, 02 Aug 2016 |
| Micro Focus Int'l | 2,139 | 4,906 | 16.1 | 2.9 | 51.8 | Buy, 2215p, 14 Dec 2016 |
| Sage | 649 | 7,010 | 24.4 | 2.2 | 16.9 | Hold, 667p, 02 Dec 2016 |
| Softcat | 299 | 592 | 15.6 | 0.6 | -8.8 | Buy, 299p, 19 Oct 2016 |
| Sophos | 275 | 1,254 | 9.7 | 0.7 | 15.7 | Hold, 228p, 09 Nov 2016 |
Favourites: The market opportunities are certainly there for all IT groups and so we’ve looked at the value arguments for our top picks. Micro Focus remains attractive, particularly in light of the HP deal. Management has proved its ability to grow through acquisitions and has successfully managed costs during a challenging year. Yet on a forward PE ratio of 14 the shares still look fairly good value relative to peers.
Outsiders: Although Aveva could benefit from a recovery in commodities markets, the share price seems to have already priced that in on a forward PE of 28. There’s also no room for disappointment at Fidessa. Despite the group’s robust cash generation, good revenue visibility and solid balance sheet we don’t think the premium – 28 times forward earnings – is worth paying right now, especially given the relative fragility of financial markets.
