Interactive Investor

Share of the week: A tech winner

24th March 2017 16:20

Lee Wild from interactive investor

We liked the look of Softcat even before it came to market in November 2015. On IPO day shares in the software reseller, and officially the second-best place to work in the country, rocketed 20%. Progress since then has been less spectacular, however.

In fact, it's been a bit of a rollercoaster for the company, whose IT solutions to improve the technology, infrastructure and security of small and medium-sized businesses, as well as larger firms and the public sector.

It had traded at around 370p before the Brexit crash last June, but only briefly, and by December was back at 283p. There was already renewed optimism ahead of this week's interim results, but the numbers were the trigger for a 12% gain over the five trading days.

Fast-growing Softcat, the largest supplier of Microsoft (MSFT) software licencing, grew adjusted operating profit by over 9% to £21.4 million in the six months to 31 January on revenue up 29% at £378 million.

"The board is confident of meeting its expectations for the full year," said chief executive Martin Hellawell. "Whilst trading in the first six weeks of the second half has been strong, we have some important months ahead and we remain focussed on the job in hand."

A 14% increase in gross profit is clearly encouraging. As Peel Hunt analyst Richard Kauffer points out, this figure is key to gauging Softcat's progress. "[It's] tracking ahead of the 7% FY17E gross profit growth expectation baked into the consensus."

Softcat trades on 15.8 times consensus earnings, a premium to peers, although Kauffer thinks it should be more.

Number crunchers at Citi also believe the rating, which drops to 14 times if you strip out cash, "undervalues its high quality growth and optionality for special dividends".

The broker thinks Softcat shares are worth 410p. Berenberg's Benjamin May reckons it could be as much as 425p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.