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Softcat benefits from robust IT market

The IT company has seen no drop off in spending from its customers.
October 25, 2022
  • Revenue increases by double digits across all divisions
  • Margins slip as wage inflation pushes up costs

IT company Softcat (SCT) posted strong full-year revenue growth despite the wider economic malaise. Management says it has seen “no evidence of weakening demand” because in a hybrid working world continued IT investment is essential.

 

Revenue growth was in the double digits across all three divisions. Hardware sales increased 43.4 per cent, while services jumped 31.2 per cent and software 16.8 per cent. The hardware sales were driven by one big cloud computing contract. However, management said even if this was stripped out, growth would still have been in double digits.

Although revenue rose quickly, margins have slipped from last year. The size of the large cloud contract meant the buyer could negotiate down on price. This contributed to the gross margin falling 4.8 percentage points to a still solid 30.4 per cent. Meanwhile, the operating margin fell 2.6 percentage points to 12.6 per cent. Central costs were inflated through the period, with a rising wage bill reflecting a 14.3 per cent increase in staff numbers and growing pay rates, the latter point no doubt exacerbated by a tight labour market.

Cash conversion suffered from an upgrade of the finance system. The conversion ratio fell from 89.9 per cent to 76.2 per cent because of issues linked to the new system upgrade. However, management maintains the implementation was successful and the rate will normalise in the first half of next year. Although there is no immediate cause for concern, investors would be well advised to keep an eye on the level of receivables. It may just be timing issues, but if they increase much faster than revenue growth it could point towards liquidity issues within the customer base.

Despite growing costs, the top line growth is impressive, especially given the wider macro conditions. Chief executive Graeme Watt suggested continued investment in IT is partly due to the expansion of hybrid working arrangements, but also because of the imperative to reduce costs through technology investment. His thesis will be put to the test in the coming months. The good news is that the company has plenty of scope to grow market share even if wider demand for IT infrastructure products softens in the near-term. Softcat has added breadth and depth to its client base, while increasing gross profit per customer by 16.1 per cent and growing the overall catchment by 2.1 per cent.

Broker Numis likes that 35 per cent of Softcat’s cost base is sales commission. This means costs will fall linearly if the market were to turn. Numis is currently forecasting a forward PE of 20.8, which looks good value despite the wider tech sell-off – certainly better than the 34 times on which Softcat was trading at six months ago. Buy.

Last IC View: Buy, 1,781p, 22 Mar 2022

SOFTCAT (SCT)   
ORD PRICE:1,108pMARKET VALUE:£ 2.21bn
TOUCH:1,108-1,110p12-MONTH HIGH:2,048pLOW: 1,059p
DIVIDEND YIELD:1.5%PE RATIO:20
NET ASSET VALUE:106pNET CASH:£91mn
Year to 31 JulyTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20180.8068.127.912.1
20190.9984.834.614.9
20201.0893.638.216.6
2021*0.7811948.420.8
20221.0813655.523.9
% change+37+14+15+15
Ex-div:10 Nov   
Payment:19 Dec   
*Restated due to changes in accounting standards. NB: Excludes special dividends of 12.6p in FY 2022 and 20.5p in FY 2021.