Stick with Softcat for growth

The company, which was founded in 1993 as a mail-order software service business, has grown to become one of the UK’s biggest IT infrastructure providers. 

Softcat’s ability to churn out earnings growth in an especially tough trading environment has been encouraging. The group’s strong first-half results revealed an increase in operating profit of around a fifth. While progress may have decelerated in the final three months of its financial year ended in July, especially as revenues are historically weighted towards the second half, its May trading update suggests that it should be able to deliver overall growth. 

Cash conversion has averaged just over 100 per cent over the past five years and return on capital employed stood at 88 per cent in the past 12 months, reflecting its very low investment needs. Softcat is also squeezing more profit out of its clients: it drove up average gross profit per customer by 12 per cent in the first half of this year. 

In the six months to March, its services division posted the highest rate of growth, up 38 per cent to £52.4m, or one-tenth of the total. Clients are shifting to Microsoft’s (US:MSFT) Windows 10 operating system from Windows 7. Microsoft’s customer service for the older-generation software expired in January, which presents Softcat with a significant growth opportunity. 

Softcat is vulnerable to the impact of economic weakness on demand from its private sector clients and management axed the half-year dividend just two weeks after the release of its half-year results in mid-March, in a move to protect its cash position. 

While the macro outlook is certainlyfoggy, the devotion of resources to national infrastructure and services could strengthen Softcat’s relationship with the public sector – which makes up just over a third of the group’s sales. 

Softcat’s sales staff are central to its operations – and recruitment will have been disrupted by the pandemic. It could be that a lag in new hires affects its revenue stream in the second half of this year. But with net cash sitting at £41.8m as at the end of January, it should be able to weather a change in its regular sales patterns.