Plenty of UK shares like Barclays and Rolls-Royce have enjoyed explosive returns in 2024, climbing by 60% or more. However, not all stocks have been so fortunate. In some cases, lacklustre returns are somewhat justified as the underlying business struggles to stay afloat. But in others, temporary headwinds have dragged valuations into bargain-buying territory.
That certainly seems to be the case for the UK IT infrastructure sector. Companies like Kainos Group (LSE:KNOS) and Computacenter (LSE:CCC) are now trading at historically low multiples as the sector has been slowing throughout 2024. However, this cyclical downturn could soon be coming to an end. And when paired with an expected rebound in IT and AI spending next year, 2025 could be a welcome return to double-digit revenue and earnings expansion.
What’s going on with digitalisation?
With economic conditions turning sour in recent years, budgets across the public and private sectors have been cut. Companies and government agencies have been reining in non-critical spending, awaiting both political and economic clarity. And that’s a headwind both Kainos and Computacenter have had to endure.
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Both firms specialise in helping customers automate and digitalise operations, with Kainos leaning more towards the software side of the equation, while Computacenter focuses primarily on hardware. Demand for IT systems, like networking and cybersecurity, has remained robust. And Kainos’s in-house efficiency plugins for the Workday platform are also still enjoying rising demand from clients.
However, beyond this, digitalisation spending is currently weak as customers focus on cutting costs wherever possible. As a result, despite some bright spots in earnings, the overall performance for Kainos and Computacenter in 2024 hasn’t been great. And consequently, the shares of these IT firms are down 12% and 19% over the last 12 months, respectively. By comparison, the FTSE 100 has jumped almost 11% over the same period.
A turnaround opportunity in 2025?
While current performance leaves much to be desired, that could all change next year. Political uncertainty from the early general election and subsequent October Budget is now largely gone. Interest rates are expected to continue falling throughout 2025. And with economic growth forecasts looking increasingly bullish, digitalisation spending could be set to recover.
In particular, UK AI spending is expected to rise considerably. Both Kainos and Computacenter are positioning themselves to capitalise on this tailwind. It’s a trend that other peers like Softcat have also identified, suggesting an industry-wide expectation of higher growth in the second half of 2025 and beyond.
Obviously, there’s no guarantee of the exact timing of this cyclical turnaround. And investors may have to wait longer than expected if the AI expectations fail to materialise next year. However, the long-term demand for efficiency through technology isn’t likely to disappear soon. And with ample cash on their balance sheets, both Kainos and Computacenter look more than capable of waiting out the storm.
That’s why I’ve already added Kainos to my portfolio, and I’m carefully considering adding Computacenter as well.
