Shares in Marlow-based IT infrastructure provider and software reseller Softcat (LSE: SCT) have soared more than 40% since the start of the year, buoyed by the company’s recent market share gains and robust revenue growth.
In the six months to 31 January 2017, Softcat’s customer numbers grew by 8.7%, its fastest pace since 2014. Moreover, revenue for the period accelerated to 28.9%, up from 10.4% in the same period last year, while adjusted operating profit rose 9.4% to £21.4m.
These results should allay recent concerns, first over whether growth in customer numbers following the company’s IPO can continue apace, and second whether Brexit uncertainty would noticeably hurt revenue growth. This has also been delivered on the backdrop of sluggish software sales in the market, which reflects the success of recent investments in its sales force and its relentless focus on customer service, which has given it an edge over competitors.
Looking ahead, City analysts expect Softcat to grow revenues by 19% for the full-year, with pre-tax profit forecast to expand by 17%. To me, these estimates seem to be on the low side, given the company’s better-than-expected first-half and its strong start to the second half, which could give investors an opportunity to buy ahead of potential analysts’ upgrades.
A share price of 414p values the company at nearly £800m, and 19.0 times estimated adjusted earnings this year. That seems to me like a high price to pay; however, valuations aren’t too far from the technology sector’s average multiple of 18.1 times forward earnings.
Turnaround potential
Another momentum stock to watch out for is LED lighting company Dialight (LSE: DIA). The specialist maker of LED lighting solutions for hazardous and industrial uses is roughly half way through its three-year restructuring plan and looks like a solid turnaround play.
The company is showing some green shoots of recovery. Its order intake for its lighting division rose by 8% in constant currency terms, while underlying annual operating profits more than doubled in 2016, to £13.1m. Additionally, the company delivered its fastest rate for revenue growth since 2014, as revenue increased 13% to £161.4m. This reflects the success of recent management actions to strengthen its product offering and the steady progress already made to reduce operational inefficiencies and streamline its operating model.
Dialight still has a long way to go, and it remains to be seen whether the company can live up to investor expectations, especially considering headwinds from soft industrial market demand.
City analysts remain sanguine, though — out of 3 recommendations, 2 are strong buys and one is a hold. They expect Dialight’s revenues to grow robustly, with forecasts of 22% revenue growth this year and 9% in 2018. They also expect margins to improve, with forecast adjusted earnings growth of 36% this year and 42% in 2018. And on these optimistic estimates, Dialight shares trade at 19.5 times adjusted earnings in 2018.
