UNDER THE BONNET
In the right place but confusion over profit margins clouds attractions
‘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.
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)