Morgan Stanley initiates coverage of Softcat, Computacenter

The bank started IT infrastructure provider Softcat at ‘overweight’ with a 1,750p price target, noting the company has grown 100% organically since inception, delivering 15 consecutive years of net revenue growth, with no use of debt/leverage.

"Softcat benefits from a best-class-returns profile (we forecast 60% return on capital employed for FY21)," MS said. "The company has continued to invest through Covid, while the 50% SME exposure should contribute a sharp rebound in 2021."

The bank said it’s confident in Softcat's ability to continue to outgrow the market/drive earnings upgrades. MS forecasts circa 11% organic revenue compound annual growth rate for FY21-24 and about 10% earnings per share CAGR.

"Softcat trades at circa 30xFY22 price-to-earnings or 3.3% free cash flow to the firm yield, above peers - we expect this premium to expand, underpinned by superior growth/returns," it said.

Computacenter was started at ‘equalweight’ with a 2,300p price target, with MS saying the shares are fairly valued.

"Operating across a wide range of geographies, with a focus on larger enterprises, the company has delivered strong total shareholder return over recent years, driven by consistent earnings upgrades.

"Looking forward, Computacenter has a higher relative reliance on services revenues (24% of revenues), particularly legacy managed services/infrastructure outsourcing (competing with Atos/DXC). We consider this area to face structural challenges as a result of rising cloud adoption."

MS also said there is some risk around the integration of three large deals simultaneously, especially during the pandemic and since the US acquisitions - Fusionstorm/Pivot - appear to be underperforming initial expectations.

As a result, Morgan Stanley said it’s more cautious on the growth outlook for Computacenter.

At 1455 GMT, Softcat shares were up 5.8% at 1,509p, while Computacenter shares were 0.9% higher at 2,148p.