SOFTCAT PLC (SCT) — Investment Research Note

Executive summary

Softcat is a UK-leading value-added IT infrastructure reseller and solutions provider selling software, hardware and services to ~10,400 UK/Ireland corporate and public sector customers, with a growing multinational and data/AI consulting capability (Oakland, acquired April 2025). Trajectory across the period covered has been an unbroken record of double-digit gross profit growth, with FY25 underlying operating profit of £180.1m accelerating into an exceptional H1 FY26 (+27.3%) and Q3 update (May 2026) upgrading FY26 underlying operating profit guidance to mid-teens growth from low single-digit at the start of the year — driven by AI-enabled infrastructure demand and pull-forward of orders from memory-chip shortages. The single most important valuation point today is that the shares have re-rated ~75% from Feb 2026 lows on the AI narrative, and now discount roughly 22–24× forward earnings, leaving little margin of safety even if the AI tailwind persists.

Fair value estimate

Methodology: forward P/E on FY27E underlying EPS, cross-checked against EV/EBIT.

Building blocks:

• FY25 UOP £180.1m → FY26 guidance mid-teens growth → ~£207m UOP.
• H1 FY26 underlying EPS was 36.1p (+25.8%); full-year FY26 underlying EPS ~82–84p at run-rate.
• Assume more normalised growth of ~10% into FY27 (memory pull-forward unwinds, tougher comps): ~90p.
• Apply 20–24× (peer range: Bytes ~22×, Computacenter ~13×; Softcat historically at a premium for consistency and cash generation).

Fair value range: 1,800p – 2,150p per share (equivalent market cap £3,530m – £4,220m). Mid FV mcap ~£3,870m vs current £3,915m → implied absolute upside/downside ~ -1%.

View: fair. After the rally, the shares essentially discount the AI-receiver bull case at a normalised, not depressed, multiple.

Sector context

Classification confirmed: Technology (ICB) — specifically IT services / value-added reseller (VAR). Quality/growth/leverage profile is above typical sector peers: fortress net-cash balance sheet (£206m at H1 FY26; new £50m RCF undrawn), higher OP/GP conversion than peers (~35%), and consistent double-digit gross profit growth. Listed comparables: Bytes Technology Group (BYIT), Computacenter (CCC), and — internationally — CDW Corp (US).

Investment thesis

• Broad-based AI-driven infrastructure demand is translating into revenue and margin acceleration. The Q3 FY26 update explicitly cites "customer demand for AI-enabled infrastructure" as a driver of double-digit GP growth, and the H1 FY26 report notes AI is stimulating spend "across all five technology towers" (compute, storage, networking, security, workplace). 2026-05-22 Q3 update; 2026-03-18 half-year
• Balance-sheet fortress supports downside protection and continued capital returns. Net cash £206m at H1 FY26, £50m RCF now in place, and a £45m buyback completed February 2026 alongside progressive ordinary + special dividends — the combination of resilience and shareholder returns is unusual in a growth stock. 2026-03-18 half-year
• Oakland acquisition strategically strengthens AI/data consulting monetisation. The April 2025 acquisition of Oakland (data/AI consultancy, £10m revenue) brings the company earlier into customer AI transformation journeys, augmenting margin-rich services alongside hardware/software pull-through. 2025-04-07 Oakland acquisition; 2026-03-18 half-year

Key risks

• Memory-shortage-driven pull-forward risk reverses. Management explicitly attributes part of H1 FY26 GII strength (+33%) to customers pulling orders forward due to memory shortages; if this unwinds, FY27 comps become punishing. 2026-03-18 half-year
• Gross margin dilution from larger, lower-margin solutions deals. H1 FY26 GP-to-GII margin fell 120bps to 13.4% due to mix into larger datacentre projects; this is manageable now but signals a mix trajectory where topline growth outpaces GP growth. 2026-03-18 half-year
• Cyclicality of UK corporate IT spend and macro sensitivity. FY24 results showed softness when UK corporate demand paused; Softcat has ~5% UK market share so a broader IT infrastructure downturn hits directly. 2024-10-24 final results

Operating leverage

Softcat has moderate, not high, operating leverage. Commission-based sales pay (~35% of operating costs) flexes directly with gross profit — this dampens both downside and upside conversion. In H1 FY26, GP grew 22.6% and underlying operating costs grew 20.2%, delivering UOP growth of 27.3% and lifting OP/GP ratio only modestly to 34.8% (from 33.5%). The severe-but-plausible scenario in the going-concern note explicitly frames commissions as a variable cost that scales with GP. Fixed cost creep is real (headcount +10.5%, new offices in London/Birmingham/Manchester/Dublin, ERP investment) which limits how much upside drops to profit. A 10-20% revenue beat likely converts to ~30-50% incremental profit — meaningful, but not the multi-baggering leverage of pure software. 2026-03-18 half-year; 2024-10-24 final results

Value-trap signals

None identified. Consistent revenue growth, unbroken double-digit GP trajectory, net-cash balance sheet, clean audit reports, disciplined disclosure, no related-party red flags, and no regulatory or terminal-decline overhang.

Earnings vs. expectations

The pattern is consistently beat and raise. FY24 delivered ahead of consensus (£154.1m OP vs £152.2m consensus). FY25 UOP guidance was upgraded from high single-digit → low double-digit (March 2025 half-year) → low teens (May 2025 Q3 update) → high teens (August 2025 trading update). FY26 UOP guidance has been upgraded from low single-digit → high single-digit (March 2026 half-year) → mid-teens (May 2026 Q3 update). Softcat has now upgraded guidance in each of the last four trading updates — a strong, consistent, positive-surprise cadence.

Conviction

Conviction: 4 — high. Anchors: (1) audited financials are exceptionally clean with strong cash conversion; (2) the business model, unit economics and market share dynamics are stable and well-disclosed; (3) multiple valuation methodologies (forward P/E, EV/EBIT) converge on a similar range. Caveats: (1) FY26 momentum is amplified by memory-shortage pull-forward, which introduces genuine uncertainty into FY27 base; (2) the appropriate multiple after the AI re-rating is a judgement call — a 2-turn compression to 20× would swing FV materially.