Softcat tops estimates, with more road to travel

Softcat’s (SCT) market “has remained relatively resilient during the pandemic”, the FTSE 250 company said as its half-year numbers topped already upgraded forecasts.

Backing up that observation, Softcat, which provides IT infrastructure technology and services, has received no government support since the Covid-19 outbreak began. Nor has it cut down the size of its employee base. On the contrary, the group’s headcount numbered 1,658 at the end of January – up more than a tenth compared with the same period 12 months earlier.

Workers weren’t added needlessly, either. Notwithstanding the murky macroeconomic backdrop, Softcat’s customer base edged up 1.5 per cent to 9,600.

It helps that the pandemic has “accelerated the pace of transformation” for organisations focusing on security, managing remote workforces and moving onto cloud-based infrastructure. Ambitions to boost productivity and efficiency while protecting data “play straight into [Softcat’s] portfolio”, the group argues.

Admittedly, Softcat was knocked towards the end of its 2020 financial year by lower income from some corporate customers – but this dampening effect has since diminished, while public sector demand has remained strong.

Specifically, the group’s gross invoiced income (gross income billed to customers, adjusted for deferred and accrued revenues) for its mid-market and public-sector divisions rose roughly a third and a fifth respectively. But it endured a 9 per cent drop among enterprise customers, citing the particular blow dealt by coronavirus to sectors such as retail and travel.

That said, Softcat’s operating profits beat expectations, growing more than two-fifths to £57.1m for the first six months of the year. This was, the group conceded, helped partly by Covid-related cost savings which it does not expect to benefit from in the second half.  

Meanwhile, after paying out a special dividend in December, cash conversion dipped slightly but was still robust at 88 per cent. The group plans to make an interim payment of 6.4p a share, up almost a fifth. Small wonder, perhaps; management is confident Softcat will achieve full-year numbers “significantly ahead of its previous expectations”.

Brokerage Numis expects adjusted EPS of 45.4p for the year ending July 2021, up from 38p in FY2020.

At 1,742p, the shares are circling their all-time high after multiple earnings upgrades. That puts their forward PE at 38 times, well ahead of their five-year average and peer Computacenter (CCC: Buy, 2,348p, 16 Mar 2021). But the group estimates its current market share (in financial terms) is just 3.5 per cent, implying there is further road to travel. Buy.

Last IC view: Buy, 1545p, 3 Feb 2021