Softcat shows signs of slowdown in IT sector

There are signs of slowdown at IT services company Softcat (SCT). Gross invoiced income (its preferred metric) was up just 2 per cent from last year, while rising costs are eating into margins. But management seems unconcerned, forecasting double-digit gross profit growth next year and operating profit in line with expectations.

Softcat has performed remarkably well given that many companies have been cutting back on costs. However, this has been the first-time that cracks have appeared, with management admitting that customers were delaying some projects. Gross invoiced income was up just 2.2 per cent, a big slowdown from the 29.4 per cent growth last year. In part this was because of there was a one-off cloud computing contract last year which made up 10 per cent of invoiced income. But even without that, growth is hardly accelerating.

Rising costs means there has also been slowdown in operating profit growth. It was up just 3.5 per cent for the year because of a 21.9 per cent rise in operating costs. Wage inflation, rising headcount and a return to post Covid-19 travel all contributed. As a services business, there are little economies of scale. To do more work, it needs more employees.

Softcat’s customers can cut back on IT spending for a short time to save on costs, but eventually they will have to catch up again. Broker Numis is forecasting EPS growth to be flat around 56p next year, before rising to 61.6p in 2025, giving a 2025 price to earnings ratio of 23. This looks a little rich but the cash flow yield of 4 per cent is more appealing. If this dip is just part of the economic cycle, it could soon swing the other way. We stick to buy.

Last IC View: Buy, 1,221p, 28 Mar 2023