Investors in Softcat (LSE:SCT) PLC are underestimating the risks from the IT infrastructure group’s exposure to smaller businesses and a likely slowdown in spending once the work-from-home trend evens out, said UBS.
The Swiss investment bank slapped a ‘sell’ rating and a 1860p price target on the shares as it initiated coverage of the FTSE 250 company.
“While its high ROIC warrants a premium we think Softcat is vulnerable to a de-rating as we expect growth to slow,” said analyst Jad Younes.
The analyst said Softcat's high level of SMEs customers exposed it to a segment that is “particularly vulnerable" as the UK government ends financial support measures, while the former boost to hardware spending growth was likely to diminish in the new financial year in the UK as remote-working and semiconductor-shortage induced demand fade.
“While software spending will be robust, it's lower margin, dragging down profitability.
“Longer-term, we believe Softcat could also see margin pressure as it has a lower proportion of business coming from services than peers, and we see services as a differentiator that gives pricing power as it adds incremental value to customers."
The analyst noted that the shares lately trade at 46.1 times forward consensus earnings, an 82% premium to its long term price/earnings ratio average of 25.6.