Softcat PLC (LON: SCT) – Operational excellence and expanded addressable market underpins bright Company prospects.

Founded in 1993, Softcat PLC is a FTSE 250 listed Company, which provides technology services and solutions in the UK and Ireland. It has a base of around 9,500 customers with over 200 vendors. It provides IT solutions to the public sector and private organisations. It serves a range of ongoing managed and support services, including networking, workplace technology, security, software licensing, cloud, and data centre. It assists public sector and commercial organisation to design, procure, implement manage the right digital infrastructure.

Key Dates:

• Softcat announced that the ex-dividend for the interim dividend of 6.4 pence was 1 April 2021, while the record date was 6 April 2021.
• On 26 October 2021, the Company expects to release its preliminary results for the year ending 31 July 2021.

 (Source: Company Presentation)

Technological Trend and Advancements

Amid Covid-19 pandemic induced restrictions, Technology has emerged as a defensive sector since the remote working environment encouraged the requirement of cloud computing, artificial intelligence, technology tools to abstain from cyber-attacks, internet-of-things, among others.

Softcat continued investment in technical proposition throughout the pandemic that yielded a double-digit growth in average gross profit per customer. It invested actively in tools, internal systems, and staff to support the current growth and capitalise on future opportunities. Their Cloud proposition has been significantly enhanced with the partnership of both AWS and Microsoft Azure, whilst the Company has been progressing well with the upgrade of its financial systems. Likewise, the Company has also evolved its offerings in digital workspace, cybersecurity, and hybrid infrastructure with incremental investment in technical solution resources. Adjacently, multinational branch network expansion in Netherland and the USA has expanded the addressable market.

Growth Prospects and Risk Assessment

Softcat has delivered 15 consecutive years of growth in profit and gross invoiced income. Moreover, the Company has maintained nearly a negligible debt position with solid cash generation, which underpins financial strength and market-leading growth. Its portfolio consists of technology offerings that are deep and broad to suit the client needs. It operates in a sector that has witnessed terrific growth and has further upside potential. Furthermore, the Company has strong partner relationships with over 200 vendors and a proven track record of customer satisfaction to create sustainable returns for the shareholders.

However, increasing incidents of cyber-attacks can put data security at risk. Also, the travel restrictions can have an impact on new business and pipeline opportunities. Similarly, lengthening of the sales cycle could have an impact on cash flows. Adjacently, increased competition can affect the Company's leadership position and its growth trajectory. Also, there is a short-term risk of supply chain disruption with Covid-19 and Brexit related uncertainties.

Now we will analyse some key fundamental and shareholders statistics of Softcat PLC.

Financial and Operational Highlights (for the six months to 31 January 2021, as on 24 March 2021)

 (Source: Company Presentation)

• During H1 FY21, Softcat sustained organic and profitable growth on a year-on-year basis with 20.4% growth in gross profit, 41.0% growth in operating profit, 19.7% growth in gross invoiced income, and 10.1% growth in revenue.
• Similarly, the customer base increased by 1.5% to 9,600, while there was a 12% headcount growth in H1 FY21 on the prior year.
• Meanwhile, the Company reported strong shareholder return and cash generation, underpinned by 18.5% year-on-year growth in the interim dividend of 6.4 pence, 88% cash conversion, cash and cash equivalents of £71.2 million with no bank debt position (as on 31 January 2021)
• During H1 FY21, SCT also experienced technological breadth in its services, corporate demand recovery, continued investment in building capacity and capabilities, positive customer and employee metrics, and stable demand since the organisations continued to accelerate focus on the security of their organisations.

Share Price Performance Analysis

   (Source: Refinitiv, Thomson Reuters)

On 23 April 2021, at 10:40 AM GMT, Softcat PLC’s shares were trading at GBX 1,909.00, up by 0.63% against the previous day closing price. Stock 52-week High and Low were GBX 1,987.69 and GBX 998.36, respectively.

SCT’s price witnessed a breakout of bullish flag (bullish continuous) pattern on a weekly chart, indicating an upside movement for the stock. The breakout of the pattern is backed by the volume as well, indicating higher market participation in the current rally. The leading indicator RSI (14-period) is trading in at ~75 levels coupled with the trend-following indicators 21-period SMA and 50-period SMA, sustaining below current market price, further supporting a positive stance for the stock.

Over the last one year, SCT’s stock price has yielded a return of around +76.65%, which has outperformed the FTSE 250 index with nearly +41.21% return and FTSE All-Share Software & Computer Services index with around +31.51% return.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)  

Business Outlook Scenario

During H1 FY21, SCT delivered an excellent organic profitable growth, while all customer segments performed well, and most business lines supported the growth. Moreover, the Company continued to invest in building capabilities despite the Covid-19 led challenges, which underpins the business resilience and the potential for future growth. Also, the structure growth drivers seem promising (such as increasing digital transformation, cloud adoption, rising need for security and mobility), which holds significant market opportunities. Furthermore, Softcat made further investment in skills and capacity, and therefore, the Company is likely to deliver FY21 results ahead of its previous expectations.

 (Source: Company Presentation) 

Considering the operational excellence, robust financial performance, technological improvement, favourable market drivers, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Softcat PLC at the current market price of GBX 1,909.00 (as on 23 April 2021 at 10:40 AM GMT) with lower double-digit upside potential based on 46.14x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

*All forecasted figures and Industry Information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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