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Softcat shares still look a bargain – can they continue positive momentum?

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Softcat LON:SCT, a FTSE250-listed IT infrastructure company based in Marlow, Buckinghamshire will publish its results next Tuesday (24th October) . The stock has done pretty well this year.

Softcat started the year at 1,201p, but by yesterday (17th October) was up year-to-date by 16.6% and over one-year was 26% ahead of where it was at the beginning of the year. January wasn’t an auspicious start for the Marlow-based company, as UBS downgraded the stock to ‘Sell’, cutting its price target to 1,070p after targeting 1,220p. UBS’s rationale was that the UK economy was looking very weak, and that Softcat was over-exposed to the SME sector in Britian, which the Swiss bank saw as the most vulnerable sector.

The bank said: “”With services representing only 13% of gross invoiced income (GII), we see additional long-term risks to margins from the shift to the cloud and the rise of cloud-based marketplaces where customers can directly procure software. The combination of the macro uncertainty, high SME exposure with continued pressure on margins provides an unattractive risk/reward in our view, and we see risks of guidance cuts.” However, Softcat has defied expectations, the UK economy has been weak, but in positive territory and the heavy lifting has been done by the SME sector.

Softcat shares hit by UBS downgrade

The company’s shares had an up and down January following the UBS judgement, but still closed out the month around at 1,221p, marginally ahead of where it had begun and over a 52-week period ranged from highs of 1,549p to a low point of 1,061p, which it dropped to in March (at least UBS got its target price), but has been on the upwards track of the escalator since.

UBS has found itself in a lonely place this year. Shore Capital updated its coverage on Softcat in May and published a ‘Buy’ recommendation with a target price of 1,537.06p. As at lunchtime 17th October Softcat was priced at 1,442p. Martin O’Sullivan, an analyst for ShoreCap said: “We retain a ‘Buy’ stance based on valuation considerations, Softcat’s strong organic track record and ability to gain market share. Getting the basics done well – customer service and satisfaction, value for money, employee engagement – has created tremendous shareholder value since Softcat IPO’d in 2015 at 280p a share. We belive there is much further to go in terms of acquiring more customers ands selling more to existing customers.”

Berenburg Bank also rated Softcat as a ‘Buy’ with a target price of 1,500p, and Barclays Capital said that Softcat’s growth was “deceptively strong”, with the company’s preference for “tried and tested” organic growth, over growth through acquisition an attractive factor. Barclays recommended clients ‘Overweight’ their portfolio with Softcat with a target price of 1,245p.


Is Softcat a worthwhile investment?

But is Softcat a worthwhile investment? Softcat was founded in 1993 and was originally known as Software Catalogue and is engaged in the business of software reselling and building IT infrastructure. On the infrastructure services side, Softcat advises, procures, designs, implements, and manages technology for businesses and public sector organizations.

It has got quite a broad spectrum of customers, from small businesses and startups, to public services, and is a ‘trusted partner’ for the UK public sector. The company, growing from its foundation in High Wycombe, now has 10 offices across the UK and Ireland, and employs around 2,000 people. By aggregating various bits of software and bolt-ons, Softcat’s strength lies in being a one-stop shop for a business’ IT needs and with its consulting arm can take away the hassle of setting-up, synchronising and managing various IT systems letting its client get on with what they are supposed to be doing, whether that’s selling loaves of sourdough bread, or managing the treatments of a ward of inpatients.

At the halfway point of its last financial year to the end of January, Softcat saw its revenue fall year-on-year by 11.3% to GBP512.4m. This did affect operating profits, which also fell by 1.7% to GBP63.1m. However, gross profits were up to GBP177.1m, a y-o-y jump of 17.9% and management decided to increase its interim dividend by 9.6% to 8p/share, which shows that they are comfortable with the direction of travel of the company this year.

A record-breaking post-pandemic year

The company noted that 2021/22 was an exceptional year with 1H21 being “record-breaking” and the company invested in its people, increasing headcount y-o-y by 21%. New customer growth was also highlighted by the company’s management, up 3.1% y-o-y which outstripped its pre-pandemic numbers. The profit it was making per customer had also gone up by 17.4%, showing good control of its margins. All the headline numbers were ahead of analyst’s expectations.

Softcat’s CEO, Graeme Watt said at the time: “Operating profit in the first six months of the financial year is ahead of the board’s initial expectations. While there is still a lot to do in the second half and the economic environment remains uncertain, due to the out performance in the first half the board now expects that the outturn for the full year will be slightly ahead of previous estimates.”

Softcat reiterated this message in a trading update on 30th May.

The company still seems a bargain at its current price. Although you can’t expect the kind of returns it has shown over the last five years, where the share price put on some 70%, there is still headroom left in this stock and could offer both dividend growth and capital returns in the coming years.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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