UBS initiates Softcat at ‘sell’, upgrades Computacenter to ‘buy’

The bank said that while Softcat’s high return on invested capital warrants a premium, the stock is vulnerable to a de-rating as growth slows.

UBS said the market underestimates the risks from Softcat's high exposure to SMBs - a segment particularly vulnerable as the UK government ends financial support measures. It noted that at the end of January, Softcat had a bad debt provision of £3m, just 1.1% of receivables.

"With 9,500 customers as of FY 20 in the UK & Ireland of which 3,800 spend less than £10k a year and just 300 more than £1m, we believe Softcat is more exposed to this risk than peers," it said.

The bank also reckons Softcat may see a slowdown in hardware spending growth in FY22 in the UK as remote-working and semiconductor-shortage induced demand fade.

"While software spending will be robust it is lower margin, dragging down profitability," it said. "Longer-term, we believe Softcat could also see margin pressure as it has a lower proportion of business coming from services than peers, and we see services as a differentiator that gives pricing power."

UBS said its ‘buy’ rating on Computacenter is predicated on the view that it can continue to benefit from its limited exposure to SMB bad debt risks and successful growth of its US presence via new local outsourcing relationships and the maturing of its US cloud relationships.

"A more mature managed services market aside, we think Computacenter is likely to see robust demand in Germany and the US which combined accounted for nearly 60% of sales in H1," it said.