Between 2007 and 2011, Computacenter, Britain’s largest IT services provider, saw profits grow by an average of 19% a year and dividends by 17% a year. Yet its shares have been hammered over the past three months, following news that the firm will incur extra costs in order to support five big new contracts. I think this plunge is an overreaction.
Firstly, Computacenter has evolved from being a simple equipment provider to becoming a provider of more elaborate services. These include updating software, providing helpdesk facilities, maintaining equipment and other IT support. This unit now accounts for 30% of revenues. If you strip out ‘pass-through’ revenues from hardware sales (whereby Computacenter buys equipment on the behalf of clients without profiting from the deal), then this figure climbs to more than 75%.
With the group’s contract base growing rapidly, its earnings quality can only improve further (as the more profitable and predictable services division grows to account for a larger proportion of revenues).
Secondly, the group has successfully diversified away from its home market into continental Europe, where demand has been stronger. In Germany, clients include manufacturers, chemical makers, and pharmaceutical firms (such as Bayer, BMW and Daimler). In Britain there’s more of a City bias towards the like of Barclays and Lloyds. The firm also owns smaller units in France and Belgium.
Thirdly, corporate demand for upgrades to Windows 7 is accelerating. This has been prompted by Microsoft ending its support for Vista: it will no longer provide automatic fixes or online technical assistance for the system, and will end its support for XP in 2014.
Computacenter (LSE: CCC), rated a BUY by Panmure Gordon
The firm issued a profit warning a couple of months ago, but this should be seen as a temporary blip. The board has spent £7m recruiting and training 700 extra staff, but this is leading to greater customer satisfaction in the firm’s German service division. Sales leapt 8% in the first half, with sales of services up 15%.
City analysts expect 2012 turnover and underlying earnings per share (EPS) of £3bn and 37.8p respectively, rising to £3.1bn and 43.25p in 2013. That puts the shares on a price/earnings (p/e) ratio of 9.2. The 4.2% dividend yield is twice covered and bolstered by net funds of £79.3m. I value the stock on an eight times earnings before interest, tax and amortisation (EBITA) multiple. Adjusting for the cash pile gives a value of 425p a share.
Risks include poor contract management and currency fluctuations. However, until the recent hiccup, the management team had a good track record and it has shown it can deliver even in tough climates. Demand should be maintained by the debut of Windows 8, along with the growing importance of cloud computing. Panmure Gordon has a 428p price target, with interims scheduled for 31 August.
Rating: BUY at 342p (market cap £525m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See
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