The FTSE 250 is rising towards new record highs in Wednesday trading. Britain’s second-tier UK share index is almost 1% higher on the day and just 150 points off recent all-time highs around 22,775 points. The Softcat (LSE: SCT) share price is one of the index’s strongest risers too in mid-week business.
At £19.10 per share, the Softcat share price is up 6% from Tuesday’s close. The FTSE 250 tech share is also a whisker off its own record close of £19.69 set earlier this month. This is thanks to a positive reception to the company’s latest financials.
Softcat to beat expectations
In a trading update for its third quarter Softcat said that it “continued to trade well” following an “exceptional” first half of the financial year ending in July.
The IT giant “delivered further double-digit year-on-year growth in revenue, gross profit and operating profit,” it said, adding that this reflected “[a] performance that was generally more broad-based than that seen in the first half.”
Softcat saw run-rate transaction volumes strengthen during the third quarter. Meanwhile cash collections and conversion had remained “good” in the three-month period.
As a consequence the FTSE 250 firm expects results for the full financial year to beat expectations.
A bright outlook
Looking beyond the current year, Softcat said that “cost savings related to Covid are expected to reverse” in fiscal 2022. It said that customer visits and attending internal events will again become possible as pandemic-related lockdowns are rolled back.
Softcat also noted that it had enjoyed some of the biggest deals in its history during the first half of financial 2021. And “significant elements” of these “were one-off in nature.” These business wins, allied with those cost savings, were expected to contribute £12m to this year’s results.
The IT firm therefore expects earnings before interest and tax (EBIT) in financial 2022 to be “broadly in line” with that reported in the current period following today’s announced upgrades. It added too that “we remain confident of the road ahead and expect to see further growth” beyond next year.
Why I’d buy this UK share
It’s clear that Softcat will find it difficult to replicate this year’s exceptional results. Covid-19 lockdowns and the subsequent spike in homeworking helped sales to explode across many UK tech stocks since March 2020.
But I’m confident that Softcat will enjoy still strong and sustained revenues and profits growth beyond the short term. Companies across the globe are switching to more flexible working models following the public health crisis. This provides firms like Softcat — a rising star in the field of IT infrastructure — with plenty of business to win in the future.
I’m aware, though, that this UK share trades on a forward price-to-earnings (P/E) ratio of 42 times. Elevated valuations like that can lead to sharp share price corrections if news flow surrounding the firm starts to disappoint.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Softcat. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.