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Softcat profiting from "broad exposure" to IT investment

Growth has continued against tough 2021 comparators as companies continue to invest heavily in new hardware.
Softcat profiting from "broad exposure" to IT investment
  • Improved dividend off the back of strong cash conversion
  • Supply chain increasing backlog of hardware

In Softcat’s (SCT) full-year results we predicted that it could be facing some tricky comparators compared with 2021. The shift to hybrid working highlighted the importance of up-to-date IT systems, which proved helpful for a company that provides a range of software, hardware and IT services. Given these comparators, the growth in the first half of this year is particularly impressive.

Although management acknowledged that the pandemic increased demand for hardware to enable homeworking, they also said that some big cloud server projects were put on hold – which means there there could be further tailwinds in that sector as spending returns.

Hardware sales increased by 56.1 per cent in part thanks to one major client embarking on a data centre project.   

But supply chain issues related to the shortage of micro-processors. Management said that these issues have persisted for longer than expected and vendors don’t expect them to improve until 2023. That meant that the order backlog has increased and is only expected to unwind gradually over the course of next year.

Hardware only makes up around 35 per cent of revenue, while cloud-based solutions form an increasing portion of the income, meaning investors should pay close attention to the gross invoiced income (GII) – like with any recurring revenue business. In this case, GII was up an impressive 33 per cent for the first half of the year. Demand for cloud migration will continue to grow – especially as the renewed focus on cyber-attacks heightens executives' focus on storing their companies’ data securely.

Customers are clearly happy with Softcat’s services and are willing to spend more on it given that gross profit per customer increased 12.4 per cent. IT is not just updated and then left alone. Technological advances in both hardware and software means constant improvement and upgrading.

Broker Numis believes Softcat offers “broad-based exposure to the structural growth in tech spending”, pointing towards the double-digit growth in GII across public sector, enterprise and mid-market customers.

At a forward PE ratio of 34, Softcat does look expensive and growth stocks aren’t in vogue at the moment with rising interest rates and macro uncertainty. However, IT spending is business critical so will be one of the last expenses cut. Cash conversion of over 80 per cent also means Softcat can deliver a healthy dividend yield – with it forecasted to be just below 3 per cent in the coming years. We keep it on a Buy.

Last IC View: Buy, 1,742p, 26 Oct, 2021

SOFTCAT (SCT)    
ORD PRICE:1,781pMARKET VALUE:£3.55bn
TOUCH:1,778-1,795p12-MONTH HIGH:2,236pLOW: 1,395p
DIVIDEND YIELD:1.2%PE RATIO:35
NET ASSET VALUE:82pNET CASH:£66mn

 

Half-year to 31 JanTurnover (£mn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
202157757.023.36.4
202277164.226.27.3
% change+34+13+12+14
Ex-div:7 Apr   
Payment:12 May