Computacenter see big cash flow boost as supply chains ease

Computacenter (CCC) both sources IT hardware and helps customers install and maintain it. In the six months to June, technology sourcing revenue grew 33.5 per cent to £2.8bn, while services grew 8.5 per cent to £817mn.

Management said the main driver of investment in digital capability has been customers’ “need to reduce non-IT operating costs” in the face of economic headwinds. Computacenter believes that this drive for efficiency, coupled with the growing cyber security threat, will push continued IT investment. All business should be trying to improve efficiency, but sometimes they need a gentle shove from rising inflation and interest rates.

However, it would be optimistic to assume that Computacenter can maintain this exceptional level of growth. Pandemic supply chain constraints meant customers made orders well ahead of time but now this huge backlog has been worked through. The product order backlog has fallen 48 per cent to £1.5bn from this time last year. There was also a “one off” order of $847mn (£667mn) from one customer which has now been delivered.

The good news is that with supply chains easing, Computacenter’s inventory reduced which boosted cash flow. Operating cash flow rose to £117mn from just £8mn. This means that the dividend is likely to increase at the full year, after it was bumped up slightly at the half-year mark.

This exceptional year – and “one off” orders might make revenue growth slow next year – does show that Computacenter is picking up the biggest clients. North America is its biggest geography and last year the region's 46 per cent revenue growth was driven by "hyperscale" customers – likely Amazon (US:AMZN), Microsoft (US:MSFT) and Google. The UK was the worst-performing locale, with just 4.9 per cent revenue growth and operating profit falling by nearly half.

Profitability couldn’t quite keep up with revenue growth, meaning operating margins did slip from 3.8 per cent to 3.3 per cent. High-margin services grew at a slower tick, and rising wage inflation increased costs. A 10 per cent increase in operating profit isn’t bad, but Computacenter admits it would rather be squeezing more out from the 34 per cent top-line increase.

Up-to-date IT services are essential nowadays, which is why FactSet broker consensus expects Computacenter’s EPS to rise to 185p in 2025. This gives a 2025 price/earnings ratio of 13. Consensus also forecasts a healthy 2025 dividend yield of 3.5 per cent. This looks good value for an international and systemically growing business. We stick to buy.

Last IC View: Buy, 2,235p, 12 Sep 2022