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Softcat: Cash cow with a solid future

Publication Date: 13 Nov 2018 - By Permjit Singh By Permjit Singh
Actionable
Differentiated

Equity Fundamental Equity EU ex-UK UK Technology

London-listed provider of IT infrastructure products - Softcat (LON:SCT) - is a well-established player in its sector with 25 years of operating history and a market capitalisation of £1.29bn. 

Its 2018 (year ending July) results show strong growth in revenue (30%), dividend (44%), special dividend (12%), and earnings per share (37%) year-on-year.  It has a healthy cash balance after dividends (£73m) and no debt on its balance sheet.

Cash is so plentiful, the company has a policy of paying special dividends to return excess to shareholders (a total of £137m of cash has been returned to shareholders over the past 3 years since its IPO).

It has capitalised (greater revenue and greater profit per customer) on its customers embracing the shift to a digital economy plus GDPR, and the investment they have had to make to effect that transformation. The company’s strategy of reinvestment will help it keep pace with its customers as they continue their digital transformation.

Softcat admits 2018 was an exceptional year - for revenue generation.  It adds however that it has managed to deliver 52 quarters of year on year growth.

As customers develop their IT infrastructure, they will need new technology, design advice, project management support, implementation capability, and ongoing maintenance and monitoring.

The company aims to cater for all these needs, either directly or in partnerships it has forged.  To its advantage, the company does not rely on one or a few key customers for its revenue - its largest customer accounts for under 2% of total income.

For: No debt; no interest; strong revenue generation per share almost matching its share price – confirming the company’s status as a cash cow; relatively high dividend yield at 3.6% (including the special dividend).

Against: Though the company is generating plenty of cash, the return on equity at 4.2% is poor.  Asset cover is low (as is to be expected for a company whose principal asset is its workforce) with the share price 13 times the tangible book value.  The market is attracted to the company but with its low EPS, that has pushed its PE ratio up - to a multiple of 24 times.

Conclusion: A strong cash generator with an attractive payout policy that will suit investors more concerned with receiving cash flow over the foreseeable future. On the other hand, poor asset cover and earnings per share, combined with a high share price, will probably make Softcat unattractive to value investors.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Permjit Singh

 

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