I’m not usually a big fan of companies with high price-to-earnings (P/E) ratios because they often have lower dividend yields, but I think FTSE 250 IT reseller Softcat (LSE: SCT) is different. It’s able to boast of great results in recent times, which should make investors sit up and take notice of its huge potential.
The reseller has been reporting impressive numbers in recent results. For the six months ended 31 January 2019, it revealed gross profits were up 27% to £94.7m and operating profit up 40% to £33.9m. These figures are broadly in line with previous increases – the last set of full-year figures showed growth of 28.5% and 36.9% respectively.
Also, in the last half year, gross profit per customer was up 19% and the interim dividend was raised by 36%. These are great figures and show growth isn’t slowing down. The reseller looks to still be able to deliver great results and, as the company has 12,000 customers, revenues aren’t dependent on only a few clients.
Then just this week, Softcat announced that full-year operating profit is likely to be ahead of its prior expectations, which lifted the share price by c.5% on the news.
The opportunity for more growth
Softcat management believes the company has the potential to grow further, and I think that is the case because the IT channel market overall is growing as IT services, software and hardware become ever more important for businesses. The key for the reseller is to keep going after market share, both by acquiring new customers and selling deeper into existing customers. So, on the one hand, the IT reseller can grow its customer base, and on the other, it can get even more income from the customers it already has, which is a win-win.
Specifically, the management talks about growth coming from both the corporate and public sector with new markets and services also a major opportunity. The company sees Ireland as a high potential market for its services as well as offering security and cyber assessment services and cloud services – both major technology growth areas.
The key figures
There’s a lot of opportunity for growth, but what does that mean for investors wanting to buy the company now? The company hasn’t gone unnoticed unfortunately, and it does trade with a P/E of around 32, partly because the share price has risen strongly so far in 2019. The upside, though, is that the dividend should be able to keep on rising as the dividend cover is over 1.2. The final dividend increased by 44.3% between 2017 and 2018, again showing the confidence the leadership has in the prospects for the reseller.
The price/earnings to growth (PEG) ratio paints a far move favourable picture as it’s 0.8. A figure under 1 is often considered undervalued and is a ratio favoured by growth-focused investors such as Jim Slater. As such, I think this number shows more clearly the positive prospects for Softcat, despite it appearing expensive at first glance because of the high P/E.
A combination of fast-rising profits, the potential for growth into new markets and services, the potential for dividend and share price growth all make me think Softcat could very well be a much better investment than a buy-to-let property.
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Andy Ross 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.