Softcat repays investor faith in spades

Given that Neil Woodford has endured plenty of negative headlines in recent months, today represents the perfect opportunity to redress the balance with a closer look at fast-growing IT services firm Softcat.

The Marlow-based company's latest trading update lifted shares 8% towards another all-time high, while continuing a remarkable record in which it has achieved unbroken revenues and profits growth for 50 consecutive quarters.

There's not much detail in this latest update, but it's safe to say that the imminent arrival of GDPR has been good for business as Softcat works with clients to clarify the impact and create a tailored plan for compliance.

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It's one reason why investors continue to opt-in for updates from Softcat, which joined the stockmarket in 2015 as a £500 million valued company. Now it is worth three times that amount and is a member of the FTSE 250 Index.

Long-time supporters include Woodford, whose funds represent the company's fifth biggest shareholding with a stake of almost 5%. Peter Kelly, who founded the business in 1993, holds a third of the shares.

Having established the business as a Microsoft partner in those early days, Softcat boasts a 23-strong team of professionals dedicated to knowing everything there is about Microsoft products and services.

The growing threat of cyber attack also means Softcat benefits from strong demand for security products and solutions across both public sector organisations and corporates.

The overall, 1,000-strong workforce is now led by CEO Graeme Watt, who joined the company in April. He has got off to a fast start with today's forecast that profits for the year to the end of July will be ahead of market expectations.

Source: interactive investor         Past performance is not a guide to future performance

That has fuelled further buying interest, contrary to the view held by much of the City that the share price is up with events. Softcat has a similar market cap to Computacenter, even though its older rival is set to deliver profits of more than £100 million this year, compared with just over £60 million for Softcat.

The possibility of another special dividend, following on from the 14.2p and 13.5p paid for the 2016 and 2017 financial years respectively, helps to retain Softcat interest alongside its continued trading momentum.

Berenberg said:

"We continue to like Softcat's ability to grow market share given that it is only 6% of the current UK market and targets more than 15%. With new office openings this should help support their national presence."

Today's update prompted Credit Suisse to upgrade its 2018 and 2019 EPS forecasts by 5-6%, although the broker is cautious about upgrading its target price beyond 740p. It currently values the company at a 25x Dec 19 price earnings (PE) multiple.

Analyst Charles Brennan said: "A 25x multiple is already at the very high end of observed sector valuations, so further multiple expansion is unlikely."

Jefferies said strategic investments in the past four years, particularly in hiring specialists to broaden technical and product capabilities, were paying off.

However, it noted that Softcat was now trading at a 40-45% premium to global peers in 2019. The broker has a price target of 725p, having last week moved from buy to hold on valuation grounds.

The company started the current financial year with a cash balance of £61.6 million and has returned £83 million to shareholders in the two financial years since its IPO. It remains debt free.