In the early 1990s, university drop-out Peter Kelly founded a software company in his shed. That company, which Kelly started with £35,000, is now worth £3.9 billion. Kelly, 63, owns about a third of its shares — so is a billionaire.
Software Catalogue, as it was called back then, is now Softcat, a FTSE 250 provider of IT infrastructure and software that listed on the London Stock Exchange in 2015. Its business model goes like this: when companies need to upgrade computers and software, Softcat provides the goods. It is a big reseller for Apple and Microsoft, and adds on additional products such as cloud services and cybersecurity — which have become an increasing focus as employees have been forced to work remotely. It has also benefited from a surge in public sector contracts, including from the NHS. Its shares have risen 76% over the past year and are trading at an all-time high of £19.45.
Thanks to investments in its own technology — sales reps can now chat to customers via video calls — Softcat has boomed. Its most recent numbers topped already upgraded forecasts. It took no government support during the pandemic and reported sales of £577 million in the six months to January 31 — up 10.1 per cent on the same period last year. Its number of customers rose 1.5 per cent to 9,600. Earnings per share were 23.3p, a growth of 39.5 per cent on last year.
The rapid upswing has proved lucrative for directors. Its chairman, Martin Hellawell, sold £6.8 million of shares in February. Hellawell, 56, was chief executive for 11 years until he stepped into the chairman’s role in 2017.
Softcat’s challenge will be to keep the party rolling. It has a 3 per cent share of a fragmented UK market. It will need to increase its share of “customer wallets” from 15 per cent to somewhere near 60 per cent by identifying more technology for them to buy. Softcat makes its money from mark-ups charged to customers and incentive fees offered by suppliers. Microsoft, its biggest supplier, is responsible for about 25 per cent of revenues.
While Kelly, who is no longer on the board, was forced to borrow against unpaid invoices in the early days to bail out his fledgling company, Softcat has been conservative ever since. It has grown organically (having never made an acquisition) and has no bank debt.
Softcat is trading at a forward price-to-earnings ratio of 42.8 times, a premium to its peers. That’s fairly punchy. It has been a winner from the pandemic, but it would take a bullish investor to pile in now. Hold.
