Software reseller is already UK’s number two but still has big growth ambitions
Thursday 01 Aug 2019 Author: Steven Frazer

This is not one of those cuddly toys contestants used to win on Crackerjack, Softcat (SCT) is what’s called a value-added reseller.

The Marlow-based FTSE 250 member sells a wide selection of third party software to small and medium-sized companies and public sector organisations, plus PCs and smartphones. It then offers deep technology expertise and advice on top.

Softcat effectively removes the burden of customers managing multiple IT products and service relationships by using it as a trusted point of contact. That’s an immensely valuable service, especially in an increasingly digitised world.

The company has a string of industry accreditations with many blue-chip household software suppliers, such as Microsoft, VMWare, Cisco Systems, IBM and HP, plus it’s the biggest reseller of products from cyber security firm Sophos (SOPH) in the UK.

The model works; in 15 years revenue has jumped from £50m to close to £1bn, while the company has become the UK’s number two value-added reseller. Seven years ago it ranked ninth.

We believe investors are underestimating the growth ambition and potential. Analysts calculate that Softcat currently has a 6% market share with forecasts for it to move closer to 9% by 2021. Yet the firm’s chief executive Graeme Watt believes £2bn of revenue is on the cards over the next few years, implying 11% or 12% market share is being targeted by management.

Importantly, this will not be at the expense of profit because the company leaves loss-leading contracts for others to fight over. This is best measured by tracking Softcat’s customer growth, its gross profit per customer and by calculating operating profit as a percentage of gross profit, which was running at about 36% at the half year in January.

The company said on 25 July that operating profit for the year to 31 July 2019 will beat expectations, pitched at about £83.5m. That’s expected to rise to £87.5m for the year to July 2020.

Softcat will face challenges, not least from those periodic IT and software upgrade weak spells. There’s also the chance that public sector spending slows as the UK grapples with Brexit. But Softcat has a long track record of managing these sort of challenges and prospering, which explains why the shares are so highly rated.

The stock is trading on a rough 2020 price-to-earnings multiple of 26.8. The growth potential is there for the longer-term, plus a rough 3.8% free cash flow yield and it pays dividends, including specials when surplus cash builds up.

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