JP Morgan sees no upside at Softcat despite share-price weakness

JP Morgan has reiterated its 'underweight' rating on Softcat following investor feedback on its recent downgrade, saying that the stock is still too expensive given the deteriorating outlook for the IT infrastructure and services provider.

Back in November, the broker cut its recommendation on Softcat from 'neutral', saying its slow earnings growth doesn't justify the stock's premium valuation.

"Following our recent downgrade to UW, we have spoken with many investors. We received limited pushback on our concerns of slowing organic growth, with investors acknowledging the challenging demand backdrop," said analyst Joseph George.

"Our more cautious view around Softcat’s margin trajectory was a topic of debate, with longer-term investors particularly interested in our views around a worsening ROIC profile and potential risks to Softcat’s track record of taking market share."

George said that some investors had argued that the valuation was now more appealing given that the stock had underperformed, having fallen 8% since the start of October, compared with a 6.5% rise for the wider FTSE 250.

"We continue to see Softcat’s ~23x [forward price-to-earnings multiple] (vs. peers on ~17x) as elevated in the context of downside risk to consensus, slowing growth and worsening ROIC," George said.

The bank has a 1,250p target price for the stock, which was down 0.7% at 1,341p by 0904 GMT.

JP Morgan prefers sector peer Computacenter, rated 'overweight', on the back of potential upside to consensus forecasts, attractive free cash flow yields and balance sheet optionality.