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Comparisons are odious for Softcat

The group’s sales and profits soared amidst “exceptional” market conditions, but will such momentum continue?
October 17, 2018

On the face of it, Softcat’s (SCT) numbers for the 12 months to July were very positive. The IT group’s top line passed the £1bn mark for the first time, and it has now seen 52 consecutive quarters of revenue and profit growth. Meanwhile, cash conversion rose fractionally to an impressive 97.7 per cent. And Softcat’s robust net cash position came despite the pay out of £45.3m in dividends during the year. Adding to the lists of ‘pros’, it has proposed another dividend hike, alongside a special cash return.

IC TIP: Hold at 718p

Gross profits – which Softcat identifies as its “primary measure of income performance” – improved by 29 per cent to £175m, giving rise to a gross margin of 16.2 per cent. Although broadly stable, this did reflect a 0.2 percentage point decline year on year. A non-recurring £2m benefit from foreign exchange related procurement savings was offset by growth within the company’s low-margin public sector partner business.

Despite an ostensibly decent set of numbers, the share price of the IT infrastructure provider clicked into reverse on results day, perhaps a reflection of profit taking after the strong share price run over the past 12 months, although that's unlikely given the 15.1p special dividend. It may simply be that the market reckons the group will struggle to match performance metrics given "exceptional market conditions in 2018”. For analysts at Investec, Softcat’s outlook “is more cautious in terms of extrapolating such sustained levels of growth, which is understandable and sensible considering potential backdrop risks” such as Brexit uncertainty and trade tariffs. The broker adds that with minimal contracted recurring revenues, visibility for the year is “naturally limited” for now.

Broker Jefferies forecasts adjusted operating profits of £75.1m and EPS of 30.6p for FY2019 (from £70.5m and 28.8p in FY2018). It also expects revenues to rise 11 per cent to £1.2bn, against FY2018’s growth-rate of 30 per cent.

SOFTCAT (SCT)   
ORD PRICE:718pMARKET VALUE:£1.42bn
TOUCH:718-719p12-MONTH HIGH:888pLOW: 418p
DIVIDEND YIELD:1.7%PE RATIO:26
NET ASSET VALUE:51pNET CASH:£72.8m
Year to 31 JulTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20140.5135.614.7nil
20150.6039.816.3nil
20160.6742.416.95.3
20170.8350.320.49.0
2018*1.0868.127.912.1
% change+30+35+37+34
Ex-div:1 Nov   
Payment:14 Dec   
NB: Softcat listed in November 2015. *Excludes proposed special dividend of 15.1p