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Softcat 'best way' to play digital transformation

The IT service provider has been consistently taking market share
March 28, 2023
  • Dividend improved by 10 per cent
  • Continued to grow customer base

IT appears to be an increasingly defensive sector, which is maybe no surprise given its essential role in businesses. IT services company Softcat (SCT) said its operating profit in the first six months of FY 2023 is ahead of expectations and now expects the full-year results to be in front of guidance.

Softcat is extending a history of producing impressive numbers. In the six months to January, gross invoiced income (GII), which is effectively its underlying sales, increased 4.9 per cent to £1.21bn. Meanwhile, its gross profit was up by 17.9 per cent to £177mn.

Software and services GII rose 24.5 per cent and 31.5 per cent respectively. This more than offset the 27.2 per cent decline in hardware. This fall in hardware was because of a tough comparator, as it was set against a large data centre contract in the 2022 half-year. Management said that if this customer was taken out of the equation, gross profit would have risen by 27 per cent.

One concern is that customers might stop paying up on time if economic conditions continue to worsen. Management said the £140mn increase in receivables is mostly due to a change in the accounting software, rather than customers facing financial strife. Despite rising receivables, cash wasn’t a problem last year, with cash conversion at 118 per cent. This allowed the management to boost the interim dividend by 9.6 per cent.

Broker Peel Hunt believes Softcat is “the best way” of playing dedicated themes such as cloud computing and cyber security. Peel Hunt’s 2025 price to earnings ratio of 19.7 looks expensive but Softcat's cash generation means the broker is expecting a healthy dividend yield of around 4 per cent. With just 5 per cent of the total market, Peel Hunt believes Softcat can keep taking market share and we agree based on the potential upside, albeit in a crowded marketplace Buy.

Last IC View: Buy, 1,108p, 25 Oct 2022

SOFTCAT (SCT)    
ORD PRICE:1,221pMARKET VALUE:£ 2.44bn
TOUCH:1,218-1,222p12-MONTH HIGH:1,778pLOW: 1,059pp
DIVIDEND YIELD:2.0%PE RATIO:22
NET ASSET VALUE: 102pNET CASH:£91.3mn
Half-year to 31 JanTurnover (£mn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
202257864.226.27.3
202351263.125.08.0
% change-11-2-5+10
Ex-div:13 Apr   
Payment:24 May   
*Last year's figures restated in line with accounting policy changes.