Softcat interim profit rises, dividend lifted amid strong demand

Softcat, a provider of IT infrastructure products and services, reported a rise in interim operating profit on Wednesday as revenue grew and the company lifted its dividend by 14% amid strong customer demand.

In the six months to the end of January 2018, operating profit was up 15.4% to £24.1m on revenue of £472.8m, up 25% from the same period a year ago, with double-digit growth across all business lines and customer segments.

Adjusted diluted earnings per share were 19.5% higher at 10.4p and the interim dividend was bumped up to 3.3p a share from 2.9p in 2017.

The company said it saw continued strong demand for security products and solutions across both public sector organisations and corporate businesses as they look to secure their operations against the growing threat of cyber attacks. Customers are also investing in their IT infrastructure to support the digital transformation taking place across all segments of the market, while there is "significant" appetite for data storage and compute solutions.

Customer numbers in the period were up 6% to 10.6k and gross profit per customer increased 15.3% to £7.1k, reflecting deeper penetration into customer requirements and cross-selling a wider product range to each.

The company said it was still keen to enter the Irish market and plans to open a Dublin office in the next 12 months.

Chief executive officer Martin Hellawell said: "We are benefiting from strong market demand for all our offerings and from all our major customer segments and continue to relentlessly pursue our simple strategy of doing more business with our existing customers and winning new customers. These latest results further demonstrate that this strategy is working and I'd like to thank our fantastic people for their great work and dedication to customer service.

"We've continued to scale up all areas of our operations whilst adding further depth to our technical expertise. This has enabled us to continue winning hundreds of new customers as well as developing existing relationships and cross-sell additional product lines and services. As a result, we added 600 new customers in the period while gross profit per customer grew by more than 15%. Those metrics extended our run of unbroken revenue and profit growth to a 50th quarter."

At 1540 GMT, the shares were down 12% to 599p, with traders pointing out that they had rallied strongly into the results.

Credit Suisse downgraded its stance on the group on valuation grounds as it said the shares were "up with positive events".

CS cut the stock to 'neutral' from 'outperform' but lifted the price target to 700p from 600p, saying the interims were "very strong".

The bank said all metrics look good, with broad-based contributors to growth, strong cash flow and a strong outlook. As a result, it upped its FY18 and FY19 earnings per share estimates by 4-5%, taking it towards consensus that upgraded on the period-end update.

"We have no operational concerns, but we believe the share price now reflects this positive outlook. Softcat now has broadly the same market cap as Computacenter and yet to December 18 we forecast operating profit of £60m for Softcat and £105m for Computacenter.

"We believe this highlights the future growth that is already reflected in the Softcat valuation. On valuation grounds alone, we downgrade our rating."

Jefferies said the interims are in line with the company's update on 6 February.

"The operational KPIs are solid with an acceleration in gross profit per customer growth driven by cross-sell and steady growth in total customers. Furthermore, Softcat's decision to open an office in Ireland helps expand its addressable market creating runway for future growth, in our view.

"With the company reiterating its FY outlook, we make no changes to our forecasts and retain our buy stance."