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Berenberg gives Softcat shares a boost, upgrading to 'buy' after raising its price target

The broker cited Softcat’s benefits from higher inflation, its run-rate earnings being ahead of expectations, and the high likelihood of a special dividend as the three key reasons behind its decision to upgrade
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Berenberg's analysts said Softcat's valuation was “reflecting a modestly higher long-term margin and growth assumptions"

Berenberg gave a boost to Softcat PLC's (LON:SCT) shares on Monday, upgrading its rating for the FTSE 250-listed IT infrastructure provider to 'buy' from 'hold' after increasing its target price to 650p from 563p following a recent trading update.

In late morning trading, Softcat’s share price was up by around 1% to 569p.

READ: Softcat edges higher as it lifts full-year guidance after strong first half

In a note to clients, the German broker's analysts cited Softcat’s benefits from higher inflation, its run-rate earnings being ahead of expectations, and the high likelihood of a special dividend as the three key reasons behind its decision to upgrade both the rating and target price.

The analysts said that Softcat's valuation was “reflecting a modestly higher long-term margin and growth assumption alongside a roll-forward of our estimates.”

They noted that: "As a reseller for technology vendors, Softcat applies a margin on top of its prices. An inflationary environment across the last year has been a significant benefit to the firm as it has been able to retain the margin that it applies, but on higher prices.

"With no inventory risk and very little FX risk, we are confident that the current run-rate on gross profit growth could be a significant benefit in the short term.”

The analysts said: “With little seasonal volatility in the business, we think there is a strong chance that the company will outperform these estimates if current run-rate growth continues”.

They also concluded that: “Given Softcat’s track record of paying special dividends each year, we believe it is highly likely that they will announce another in the region of £40m within the next year.”

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