UN­DER THE BON­NET

In the right place but con­fu­sion over profit mar­gins clouds at­trac­tions

Shares - - CONTENTS -

‘Bor­ing’ Com­puta­cen­ter is too ex­pen­sive to buy de­spite im­pres­sive to­tal re­turns

This year Com­puta­cen­ter (CCC) cel­e­brates 20 years on the Lon­don stock mar­ket. That’s a long time for any stock but more re­cently it has re­fined its busi­ness to be­come a ‘Bor­ing’ award win­ner in June 2018, the tongue-incheek gongs handed out by re­spected UK tech­nol­ogy an­a­lyst Richard Hol­way.

The ‘Bor­ing’ awards go to IT ser­vices busi­nesses listed on the Lon­don stock mar­ket with an un­bro­ken 10 year track record of earn­ings growth. Bor­ing sounds detri­men­tal, what it re­ally im­plies is that the busi­ness is very re­li­able even if a lit­tle bit dull.

Com­puta­cen­ter is only the sev­enth com­pany to win a ‘Bor­ing’ award since their in­cep­tion in 1993. In­surer

Ad­mi­ral (ADM), out­sourc­ing firm Capita (CPI) and Sage (SGE), the ac­count­ing and en­ter­prise soft­ware com­pany are some of the pre­vi­ous winners (although the last two have since lost the ac­co­lade).

Com­puta­cen­ter is not a name that ev­ery in­vestor will be fa­mil­iar with, de­spite be­ing a FTSE 250 stock for quite a while. It is a truly global IT en­ter­prise op­er­a­tor whose 14,000-odd staff an­nu­ally ship more than 25.5m prod­ucts to 4.2m end users. Af­ter that the com­pany pro­vides ser­vices and sup­port in 30 dif­fer­ent lan­guages.

FULL SER­VICE IT

The del­uge of smart­phones and tablets in use to­day, on top of the mil­lions of desk­top PCs still in use is more kit the com­pany can sup­ply a client, al­beit on pretty skinny profit mar­gins. This is the in­fras­truc­ture side of the busi­ness.

Pro­fes­sional ser­vices is where Com­puta­cen­ter ex­perts con­sult and ad­vise clients on a mul­ti­tude of best-in-class soft­ware and ap­pli­ca­tions, and re­sell what’s right for them.

We’re talk­ing about proper blue-chip venders, such as Mi­crosoft, Or­a­cle, Adobe, Cisco and Sy­man­tec. Man­aged ser­vices go fur­ther still, pro­vid­ing an en­tire out­sourced IT so­lu­tion.

This means clients don’t re­quire ex­pen­sive in­house IT teams, Com­puta­cen­ter runs the whole show re­motely on the client’s be­half, with 24/7 sup­port, ad­vice and prob­lem solv­ing avail­able and lo­cal soft­ware en­gi­neers avail­able when needed.

What has made the shares a su­perb in­vest­ment over the years is the com­pany’s steady growth, ex­cel­lent cash flows and re­li­ably ris­ing div­i­dends. Last year to 31 De­cem­ber 2017 it paid 26.1p per share to share­hold­ers, a pay­out 17.6% higher than 2016’s 22.2p.

Com­puta­cen­ter hates to sit on idle cash, so it hands sur­plus funds back to share­hold­ers, ei­ther through strate­gic buy­backs or spe­cial div­i­dends. Since 2006 the com­pany has paid out £249.4m worth of cash in bonus div­i­dends, or 159.6p per share, ac­cord­ing to the cal­cu­la­tions of an­a­lysts at bro­ker Stifel.

There’s another £100m pay­out due later this year too,

which new in­vestors can still pre­sum­ably grab their slice since the pay­ment de­tails and dates have yet to be fi­nalised.

To­gether it im­plies a rough 231.5p per share in one-off cash re­turns, which alone im­ply a 15% in­come yield on the cur­rent £15.66 share price. That share price has it­self been a source of pleas­ing re­turns for longer-run share­hold­ers. Since the worst of the fi­nan­cial cri­sis roughly 10 years ago the stock has in­creased al­most 15-fold from late 2008 lows of 102p.

LONG-HELD CRIT­I­CISM

Some in­vestors still re­tain cer­tain per­cep­tions about Com­puta­cen­ter. One, that it is a fun­da­men­tally low mar­gin busi­ness. Two, it is in­her­ently cycli­cal and three, that the cur­rent val­u­a­tion is too high.

The stock is cur­rently trad­ing on a 2018 price to earn­ings mul­ti­ple of a lit­tle over 21, and only falls to 19.8 on 2019 earn­ings fore­casts of 79.1p, based on Beren­berg num­bers.

What we know is that op­er­at­ing mar­gins last year were 2.8%, which looks dread­ful. Yet more than 70% of rev­enue comes from low mar­gin hard­ware pro­vi­sion, it’s just sup­ply­ing IT boxes (de­vices and PCs) as part of its ser­vice.

Since Com­puta­cen­ter doesn’t spell out op­er­at­ing profit by divi­sion it is dif­fi­cult to work out what pro­fes­sional and man­aged ser­vices prof­itabil­ity is like.

Beren­berg ar­gues that in­vestors can get round this is­sue by com­par­ing op­er­at­ing profit to gross profit, which ‘has con­tin­u­ally im­proved from circa 10% in 2005 to about 21% in 2017.’ This sounds a bit con­vo­luted to Shares, we’d pre­fer the com­pany to sim­ply tell in­vestors how op­er­at­ing prof­its break­down more clearly.

The cycli­cal­ity claim is also in­ter­est­ing, and we think the pic­ture here is more en­cour­ag­ing. Just think how the world has em­braced tech­nol­ogy over the past 10 year or 20 years. On­line shop­ping is a great ex­am­ple.

This trend will not re­verse. This im­plies that in­creas­ingly busi­nesses will be look­ing for trusted tech­nol­ogy part­ners to pro­vide ad­vice, ac­cess to ap­pli­ca­tions, and the ex­per­tise to im­ple­ment and man­age IT tolls on their be­half.

That sounds very good for Com­puta­cen­ter. We an­tic­i­pate that the com­pany go­ing for­ward will con­tinue build­ing out its op­por­tu­nity base both ge­o­graph­i­cally and by in­dus­try seg­ment. Ac­qui­si­tions may well form part of that strat­egy, it will prob­a­bly have to if the com­pany is to re­main on top of tech­no­log­i­cal shifts and devel­op­ment, such as in­ter­net of things, ro­botic au­to­ma­tion, ar­ti­fi­cial in­tel­li­gence, and others as they emerge.

While there is an in­ter­est­ing to­tal re­turns story here, we can­not es­cape the view that on mar­ket fore­casts and other rea­son­able as­sump­tions, the shares look fully val­ued where they cur­rently trade. (SF)

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