FTSE 350: Mergers & acquisitions could boost software stocks

That’s ostensibly good news for Softcat (SCT) – a seller of IT infrastructure technology and services. Jefferies believes the group is “well-positioned” to capture any such increases in spending, because of its work to expand its public-sector business (an area that constituted 35 per cent of the group’s total gross invoiced income (GII) over the year to July 2019).

More government investment in IT could, presumably, also bode well for peer Computacenter (CCC). In any case, both companies have seen stellar share price momentum over the past 12 months – up by more than 80 per cent and 70 per cent, respectively. Little wonder, perhaps, given that both have also delivered strong performances.

Softcat’s management said back in November that – although only at the first-quarter stage – it was confident about achieving its goals for 2020.

Meanwhile, in December, Computacenter guided towards full-year results “well ahead of current market expectations in both profitability and earnings per share”. And in a 23 January trading update, the group said that it was “comfortable with the upper end of current market expectations” for 2019 – noting ahead of March’s results that it had seen its “best ever” performance in terms of revenues, profits, EPS and cash from ongoing operations. A promising – but tough – act to follow, one might venture; Computacenter itself says that such results “set a high bar for the business as we go into 2020”, albeit it cites multiple growth drivers.

2019 was also a good year for the market values of London’s top two cyber-security stocks: Sophos (SOPH) and Avast (AVST). Indeed, Sophos attracted a $3.9bn bid from US company Thoma Bravo in October – and won’t thus appear in next year’s FTSE 350 review. Shares in Avast, which floated in May 2018, now change hands at more than double their 250p IPO offer price – helped, one might imagine, by hopes that it will court takeover offers of its own.

To the latter point, analysts at JP Morgan Cazenove – who recently upgraded their view on Avast from ‘Neutral’ to ‘Overweight’ – note that “M&A is happening in the space, and Avast ticks a number of boxes as a potential acquisition target”. They say that the group’s “financial profile is attractive”, thanks to its strong revenue visibility, high adjusted Ebitda (cash-profit) margins and strong free cash flow generation.

Avast said in its October trading update that it continued to expect full-year adjusted revenues to be at the upper end of high-single-digit growth. Such an outcome seems achievable, given the group’s more-than 435m-strong user base – not to mention the fact that its core addressable market areas (consumer security, small- to medium-sized business security and analytics) are expected to expand from $14.6bn in 2017 to $21.3bn in 2021. February’s results should give a sense of management’s outlook for 2020.

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Industrial software group and recent IC buy tip Aveva (AVV) has an addressable market estimated to be worth £15bn. The group’s combination with Schneider Electric’s software business has diversified its customer base, and more synergies between the two businesses could yet emerge. We think broker upgrades may well continue as we move through 2020. The shares do command a steep valuation, but we’re encouraged by Aveva’s ambitious growth targets and the outlook for its customer end markets.

Outsider 

Shares in Micro Focus (MCRO) plunged last August after the group revealed that it did not expect to meet constant-currency revenue guidance of -4 to -6 per cent for the year to October – revising its outlook downwards to -6 to -8 per cent. At the time, it cited weak sales execution, compounded by a worsening macro environment. On the plus side, a November statement said that trading was expected to be in line with this guidance. But the share price hasn’t recovered since its summer slide. Within the August update, we learnt that the board was accelerating a strategic review of Micro Focus’s operations. February’s results should offer further insights into this.