IT firm Softcat delivers more big returns

After four profit upgrades this year, IT stock Softcat has produced more big returns for shareholders.

IT infrastructure continues to reward investors after fast-growing Softcat (LSE:SCT) unveiled another chunky special dividend to round off a year of profit upgrades and strong trading.

The group, which joined the stock market in 2015 and has delivered a 14 year‐long sequence of organic growth, said further strong cash conversion meant December's planned special payment would rise by 6% to 16p alongside an 18.2% improvement in the final dividend to 10.4p. The payments bring cash returned to shareholders since 2015 to £197.9 million.

Shares have also risen 60% so far this year after a string of profit upgrades, with Marlow-based Softcat seeing strong demand from public sector organisations and corporates concerned about cyber security or the need to use innovation to stay on top of regulations such as GDPR.

As a measure of the company's recent success, shares fell back 2% today to 916.5p after Softcat CEO Graeme Watt failed to upgrade forecasts following the first 11 weeks of the financial year. This leaves shares trading at a discount to September's all-time high of 1,044p.

Analysts at Numis Securities think there's the potential to reach 1,070p, which would take the FTSE 250 index company's market valuation back above £2 billion. It is worth £500 million more than rival Computacenter, which has also enjoyed a good run in recent months.

Berenberg described Softcat as a "multi-year winner", adding that it was notable in today's results that the bulk of revenues growth came from increasing gross profit per customer.

They added:

"UK IT infrastructure is performing exceptionally well with UK corporations continuing to invest heavily as they struggle to meet increasingly strict new regulation, new operating systems coming online and a shift to Cloud or hybrid cloud solutions."

These trends were reflected in the company's annual results to the end of July, which after four upgrades in the year showed 24% growth in revenues and operating profits to £991.8 million and £84.5 million respectively. Diluted earnings per share improved 25% to 34.4p.

Watt, who joined the company last year, noted that progress had been broad based, with all eight regional offices as well as customer segments and technology categories showing growth over 2018. The company now employs 1,330 people, having lifted average headcount by 15% in the past year.

He added: "We previously reported that 2018 was a strong year for structural growth in our industry, which we saw again during 2019.

"This is a trend we think will continue over the medium‐term. The world is becoming ever more connected and the demand for digital infrastructure will only continue to grow."

Analysts at Jefferies said the company's record of strong execution and quality of growth meant its rich valuation was warranted, with shares trading at a 38% premium to Computacenter (LSE:CCC).

They added: "Although Softcat's business is inherently cyclical, growth in gross profit per customer suggests growth remains well supported, underpinning a premium valuation vs peers.” Jefferies raised its price target to 978p following today's results.