ii view: Computacenter profit gloom keeps pressure on

Third-quarter trading update to 30 September

• Now expects full-year adjusted pre-tax profit on a constant currency basis to be modestly below 2023
• Completed £191 million of a £200 million share buyback

ii round-up:

IT firm Computacenter (LSE:CCC) today flagged late September technology sourcing volumes below management expectations given a more cautious corporate spending environment.

As such, the seller of IT hardware and consultancy services now expects annual adjusted pre-tax profit on a constant currency basis to be modestly below 2023’s outcome of £278 million. The City had already been expecting a 2024 adjusted profit of £269 million, which includes a potential £8 million currency hit. 

Shares in the FTSE 250 company fell 1% in UK trading having come into this latest news down 16% year-to-date. That’s better than a 25% fall at fellow IT company Kainos Group (LSE:KNOS), but in contrast to a near 7% gain for the FTSE 250 index in 2024.  

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As well as supplying IT equipment, Computacenter also advises organisations on IT strategy, implements the most appropriate technology, optimises performance, and manages its customers’ infrastructures.

Following a strong start to the third quarter, slower completion of committed product orders in North America had occurred, with some US shipments now expected to complete in the fourth quarter or early 2025. The USA accounted for nearly 40% of 2023 sales.

Elsewhere, UK demand, generating around 18% of annual sales, ran ahead of last year although below management’s previous hopes. Demand in Germany, Computacenter’s second biggest market at 29% of 2023 sales, broadly matched hopes. 

A total of £191 million of its £200 million share buyback had been completed, Computacenter expecting to maintain a strong balance sheet via adjusted net cash held. 

Broker UBS reiterated its ‘buy’ rating on the shares post the news, flagging an estimated target price of £30 per share. A full-year trading update is scheduled for 28 January.  

ii view:

Started in 1981, Computacenter is today a major provider of computing hardware equipment, software, and consulting services. Group customers do or have included International Business Machines Corp (NYSE:IBM), Dell Technologies Inc Ordinary Shares - Class C (NYSE:DELL), Cisco Systems Inc (NASDAQ:CSCO), and Microsoft Corp (NASDAQ:MSFT) and Transport for London. Podium or major customers earlier in the year totalled 190, up from 183 at the end of 2023. 

For investors, pressured corporate spending budgets given high borrowing costs and an uncertain economic outlook appear to be impacting business. The previous boost from the pandemic in terms of both customer requirements and Computacenter’s own temporarily reduced costs, have provided tough comparatives. Staff wage pressures across the IT sector persist, while customers are also likely to be building direct relationships with major manufacturers such as Dell. 

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More favourably, IT efficiency, digitalisation and cyber security remain key focuses for companies, organisations, and governments globally, with the AI era well underway. Customer sector and geographical diversification exist including growing a presence in India. Group net cash of £401 million was held as of the firm's interim results, potentially providing for possible bolt-on acquisitions, while a forecast dividend yield of around 3% is not to be ignored.   

Spending on technology is regularly volatile and unpredictable, and these FTSE 250 shares have fallen out of favour over the past few months. However, the stock is likely to remain a core consideration for investors seeking exposure to a UK headquartered and listed tech focused company.   

Positives: 

• Product and customer sector diversity
• Own investment programme

Negatives:

• IT sales are often volatile
• Currency moves can impact

The average rating of stock market analysts:

Buy