Softcat shares jump after exceeding profit expectations and upbeat guidance

Investing.com — Shares of Softcat (LON:) jumped over 10% on Thursday following its results, which beat estimates.

Operating profits came in 1% higher than consensus estimates, largely due to lower operating expenses. 

The company reported gross profit of £417.8 million for FY24, marking an 11.8% year-over-year increase, which was in line with market forecasts. 

The company showed strong growth momentum, particularly in the second half of the year, where gross profit growth reached 12.5%, compared to 11% in the first half.

The company’s customer base remained diverse, with growth reported across both the private and public sectors. 

This balance was noted as a positive contrast to recent reports from competitors, indicating that Softcat’s business model is resilient amidst challenging market conditions. 

Furthermore, growth was observed across all product categories, including software, hardware, and services, showcasing the firm’s broad-based appeal.

Operating profit for the fiscal year stood at £154.1 million, surpassing consensus expectations of £152.6 million. The second half of the fiscal year saw operating profit growth accelerate to 12.3%, up from 6% in the first half. 

This improvement was primarily due to a reduction in operating expenses, which grew at a slower rate of 12.6% compared to 13.9% in the previous half. 

Analysts at Jefferies pointed out that this performance indicates a more efficient cost management strategy than previously anticipated.

Despite a solid cash flow performance, with cash conversion at approximately 96%, analysts cautioned that this figure was bolstered by a £6 million increase in long-term deferred income. 

Without this adjustment, cash conversion would have dipped to around 92%. While this remains a healthy level, analysts noted that cash generation below 100% could affect valuations in the future.

Softcat has guided for double-digit gross profit growth and high single-digit operating profit growth for FY25. 

However, the company plans to roll out a new sales platform, which may result in either exceptional costs or capitalized expenses—an approach not typically associated with Softcat. 

This development has led to speculation that consensus forecasts for FY25 free cash flow may need to be revised.

“Against weak sub-sector newsflow, this is better than it could have been, but with the shares trading on a FY25e FCF yield of 3.7%, we see limited valuation attractions,” said analysts at Jefferies in a note.