When buying tech shares, it is easy to focus on the US market and overlook UK tech shares. But one of the UK tech firms I like is Computacenter (LSE: CCC). Computacenter shares have shed 28% of their value in the past year.
However, as the company’s final results issued today show, Computacenter is a fairy reliable if somewhat unexciting performer. Yet its shares trade on a price-to-earnings ratio (using pre-tax earnings) of just 10, which I think is cheap. Should I invest?
Ongoing profitability
The company saw a big jump in revenues last year, as they grew 28.5% to £6.4bn.
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That did not translate to sharply higher profits, however. Adjusted profit before tax grew 3.2%, while pre-tax profit inched up 0.4%. Still, at £249m, profit before tax was substantial. Currently, Computacenter has a market capitalisation of £2.6bn.
The annual dividend per share grew 2.4%. That might not sound like much, but I think it is worth noting that the current dividend of 67.9p per share is more than double what it was just four years ago. The dividend yield is 3.2%.
Market reaction
The discrepancy between the growth in revenue and profits concerns me, as it suggests a risk that Computacenter is getting bogged down in lower margin work than previously.
But overall, the performance was very strong. Yet Computacenter shares have lost a lot of ground over the past year. As I write this on Friday afternoon, they are up less than 3% in the day’s trading session.
I think Computacenter has a couple of challenges that are dogging its share price.
One is an investor perception that it is at the less glamorous end of the tech sector, installing computing networks and helping clients source cables. In reality, the company offers a range of professional services. Its business model lacks the scalability of software stars like Microsoft, but still benefits from client need for tech solutions that encompass not only hardware but also software and consultancy.
Should I buy Computacenter shares?
Another strain on the share price is the risk of sharply lower revenues and earnings as clients rein in spending.
When the pandemic led staff to work from home, many companies spent massively on their tech setup. With that large expenditure now behind them and the business environment in many sectors becoming more financially tight, tech spending is again falling down executives’ priority lists.
Computacenter struck an upbeat note in its results, however, saying that it is “positive about the outlook in the short, medium, and long term”.
To me, it seems that Computacenter shares merit a higher valuation than they currently command. The company has a large customer base, diversified income streams and is consistently profitable. As today’s results demonstrate again, its business model of operating a wide-ranging tech service business across diversified markets has helped it gain scale and develop deep customer relationships.
If I had spare money to invest today, I would be happy to add Computacenter to my portfolio.
