Berenberg starts Softcat at 'buy'

Berenberg initiated coverage of Softcat, which provides IT infrastructure to corporate and public sector organisations, with a ‘buy’ rating and a 425p price target.

The bank said the business has successfully quadrupled revenues in the past five years and delivered EBIT margins materially higher than peers.

It said that with its capital-light model, Softcat should be able to deliver a return on capital employed of 60% in 2016.

“Despite a strong performance in the shares since its IPO in November 2015, we believe Softcat still has scope to grow its customer base and take market share.

“With strong cash conversion we forecast the business to grow its net cash position substantially, giving capacity for major shareholder returns.”

Berenberg highlighted “serious top-line potential” at Softcat, pointing out that the company has delivered a revenue compound annual growth rate of 33% since 2010.

The market growing at around 6% a year across the same period means Softcat outperformed the market by a factor of 5x.

With underlying market growth of 5% a year estimated between 2016-18, Berenberg has conservatively projected that Softcat will grow at 2.5x market growth, implying a top-line CAGR of 13%.

At 1000 BST, Softcat shares were up 1% to 332.90p.