Softcat facing tough comparators next year

In the last 18 months, corporate IT teams received the praise they may have always deserved. The relatively smooth shift to hybrid working was one of the main successes of the pandemic and has emphasised the importance of having a flexible IT function. This is good news for IT company Softcat (SCT), which provides a range of software, hardware and IT services.

In the last year, its gross invoiced income increased 18 per cent to £1.94bn. Its hardware invoices increased 23.6 per cent to £566m, while software jumped 15 per cent to £1.1bn. Revenue increased by a relatively modest 7.4 per cent because IRFS 15 accounting rules calculate cloud solution sales net of product costs. As cloud solutions are making up an increasing portion of Softcat’s revenue, investors should pay attention to the invoice numbers.

Total cost growth was slower because restrictions from decreased travel and events during the pandemic helped generate cost savings of around £1m per month. Subsequently, the operating profit margin increased 1.6 percentage points to 10.3 per cent. However, management hopes to resume these activities in the coming year which should mean an increase in costs.

This increase in costs next year will create significant headwinds during 2022 and the company has warned that the comparatives will be difficult against the first half of 2021 when it completed some “exceptional deals”. It expects operating profit for 2022 to be in line with this year. This conservative outlook is likely why its share price fell 5 per cent on the morning of the announcement. With a forward PE of 45 investors are probably expecting more impressive growth.

Management and broker Numis are not worried about the supply chain issues other companies are facing because, as one of the biggest IT companies, its relationship with vendors is very strong. However, Numis has decided to downgrade it to a 'Hold' because of the forecast of flat operating profits next year.

Now that the flat profit forecast has been priced in this could be a good time to buy. Even before the pandemic it had a great growth track record, with operating profit almost doubling in the four years to July 2020. Hybrid working is here to stay and that means demand for quality IT infrastructure should steadily increase. Softcat only has 3 per cent of the market currently, so there is plenty of potential headroom. Buy.

Last IC View: Buy, 1,742p, 24 Mar 2021