BUY: Bytes Technology (BYIT)
The IT service provider is set to benefit from the surge of interest in Microsoft’s AI software products, writes Arthur Sants.
Bytes Technology delivered another impressive set of results. And it was made to look even more impressive by the slowing growth reported by rival IT service provider Softcat the day before.
Softcat’s annual gross invoiced income (GII) had slipped down to 2 per cent which suggested Bytes Technology might struggle. However, Bytes saw its GII rise 38 per cent to £1.08bn, while its operating profit was up 12 per cent to £30.6mn.
A lot of this growth came from a couple of large “strategically important” contract wins from the public sector, with both the NHS and HMRC signing up to large Microsoft contracts. Whereas Softcat had difficult comparators because it had a large cloud computing contract which didn’t repeat the following year.
Bytes Technology has Microsoft Azure Expert status which means it should grow roughly in line with Microsoft’ cloud growth. Yesterday, Microsoft reporter Azure had grown 29 per cent year on year in the most recent quarter due to the growing hype around its artificial intelligence (AI) product. Companies need to be in the cloud to get access to the 365 Copilot AI product when it is eventually rolled out.
Bytes said it expects a strong response to 365 Copilot from its customers which will increase into 2024 and beyond. If this proves to be the case it should support margins, as software is generally more profitable than hardware on a unit basis.
The results are ahead of broker Numis’ expectations. It had been expecting gross profit and adjusted operating profit growth of 12.5 per cent and 10 per cent, respectively. Instead, Bytes delivered 15 per cent and 13.8 per cent. The broker has only kept its full-year guidance unchanged because of the uncertain economic backdrop.
In the medium term, Numis sees the trend towards cloud computing and digitisation as structural growth drivers. Companies might delay spending when the economy is underperforming but, eventually, they will need to update their IT services, otherwise they will fall behind competitors. The broker is expecting Bytes’ EPS to rise to 22p by 2026, up 22 per cent from the last full year.
At a forward price/earnings ratio of 25 it is looking a bit more expensive. For comparison, Softcat is trading on 21 times, but recent growth is a lot slower there. Bytes is also cash generative and is happy to hand some back to investors as shown by the 2 per cent dividend yield. There are few areas of growth left in the economy, but cloud computing is one of them.
HOLD: Reckitt Benckiser (RKT)
The new chief executive has set out an updated strategy as volumes continue to stutter, writes Christopher Akers.
Reckitt Benckiser’s surprise announcement of a £1bn share buyback programme was not enough to satisfy investors on update day, with the consumer goods group’s shares slipping after it reported worse than expected sales volumes in its third quarter.
Like-for-like net revenue rose by 3.4 per cent to £3.6bn in the quarter against last year, driven by the performance of the hygiene and health divisions. But on a reported basis, net revenue fell by 3.6 per cent as a weak quarter for the nutrition division and foreign exchange headwinds dragged down results. Actual nutrition revenue fell by 15.4 per cent from the tough comparative period in which the company benefited from supply problems at Abbott Laboratories.
Overall volumes fell by 4.1 per cent, highlighting investor concerns that consumers have traded down to cheaper own-brand products. Nutrition volumes contracted by 15.7 per cent against what management described as “high unsustainable peaks last year”. Health volumes were up by 3 per cent, but hygiene volumes were down by 3.4 per cent, albeit trends are improving.
The share buyback, combined with new growth targets set out in a fresh strategy, presents a bit of a mixed picture for prospects under chief executive Kris Licht. The new boss, who took the reins at the start of October, has extended the target of mid single-digit like-for-like net revenue growth from 2025 to sustained growth over the medium term. But RBC Capital Markets analysts argued that the replacement of a mid-20 per cent margin target with the aim to “grow adjusted operating profit ahead of net revenue” represents a “probable reduction in medium-term margin guidance”.
On a shorter-term horizon, management kept guidance for the full year unchanged. The board still expects like-for-like net revenue growth in a range of 3-5 per cent, and an improvement in adjusted operating margins.
The shares are valued at 17 times consensus forward earnings, according to FactSet. This is cheaper than the five-year average of 19 times, but we see little inducement for a recommendation change.
HOLD: ScS Group (SCS)
In light of worsening trading conditions, shareholders are likely relieved at the news of the group’s acquisition, writes Jennifer Johnson.
Just one day before the release of its full-year results, furniture retailer ScS Group revealed it had agreed to be bought out by Italy’s Poltronesofà. The deal will see ScS’s shareholders granted 270p per share, as well as a final dividend of 10p per share.
The offer represents a premium of 66 per cent to the group’s closing share price of 169p on October 23. The Poltronesofà board said it views the acquisition as a logical next step in its pan-European expansion. ScS shares now trade at the offer price, and will shortly be delisted from trading on the London Stock Exchange.
This means there’s virtually no scope for further share price gains, though some existing investors will no doubt be pleased with the profit they’ll realise on completion of the sale. ScS has been trading below 270p for almost two years after rallying to an all-time high of 320p in June 2021.
Trading conditions have recently become more difficult — with the company reporting that like-for-like order intake increased by just 0.3 per cent in September before declining by 4.4 per cent in October.
However, it also claimed to have boosted its market share across the year to the end of July, “further cementing” its position as the UK’s second-largest retailer of upholstered furniture. Its gross margin was just over 44 per cent, representing a 1 per cent fall from the prior year due to the increased costs of providing credit to customers. This was partially offset by price increases.
Given there is no end in sight to the UK’s economic uncertainty, furniture demand could well remain suppressed for several quarters to come.
