Computacenter - Final Results 2013

Carrying on the recent technology theme here we have final results today from an Investment I have in the technology sector. I got into this one back in a January 2012 sale in the stock market when it was being offered at half its current price.
What attracted me to it at the time was hearing that Warren Buffet had a big stake in IBM on the basis of its IT service operations. I settled on this one as a way of playing that theme in the Europe. In addition, as I have become my own IT support desk for myself and my family I can appreciate that firms would value their services especially as it is not always a case of just turning it off and back on again!

While most technology companies are highly rated this one was fairly cheap because it has low margins and is providing fairly basic IT infrastructure services although they also advise customers on their IT strategy, implement the most appropriate technology from a wide range of leading vendors and manage their technology infrastructures on their behalf. Since IT has become such a crucial part of most Companies I saw how their services could be in demand and there was also a trend towards outsourcing in this area. It also has cash on the balance sheet and pays a nice well covered dividend which has grown a a fair rate over the last few years. 

So today's results saw their turnover come in at £3072 billion versus £3040 (F) which was up by 5.4% and 2.5% in constant currencies, with profits before tax up by 3% and 1.4% on the same basis to £81.7 million. They also highlighted that this was the fourth year of turnover growth and that service revenues (presumably higher margin than hardware supply) now account for 31.4% of the turnover. This gave adjusted diluted earnings of 43.3 pence up by 6.1% versus 42.1 pence (F) and they declared a full year total dividend of 17.5 pence up by 12.9% versus 17.3 pence (F), so a small beat overall. 

Elsewhere in the results they still have net funds of £71.4 million, although some of this is I believe customer money and upfront payments etc. They also took a £28.8 million exceptional charge on some previously disclosed troublesome contracts in Germany and they also wrote down the goodwill on their French business by £12.2 million due to deterioration in business performance there which did not meet their plan. On this they said: "We have been extremely disappointed by the Group's performance in France. Whilst this has no doubt been impacted by the ongoing and prolonged poor market conditions, it was also impacted by a number of operational issues arising in part from the implementation of our Group ERP system. Whilst these operational issues are now substantially behind us, we are taking robust action in order to improve the performance of the business in the medium term. This includes the extension of our Group Operating Model into France, alongside a strategic shift towards a more Services-based business model, similar to those currently seen in the UK and Germany. There remains significant work ahead over the next eighteen months to ensure that these changes are implemented successfully." 


This continues a trend of difficult trading in Europe in recent years although they do say that their Group operating model has now been successfully implemented in the UK and Germany and is already delivering benefits. The Group operating model that they mention throughout the statement seems to aim to leverage the Group's systems and processes consistently across its operating geographies and has helped to resolve operational problems on the three onerous contracts in Germany, as well as ensure robust contract governance on new bids. On the outlook the Chief Executive, Mike Norris commented:

"The Board expects Computacenter to make further progress in 2014. At such an early stage of the year it is difficult to be very specific about the outcome, but we believe all of our major geographies will move in the right direction. 

In 2014, we will continue to build on Computacenter's strong platform by increasing its number of customers, broadening our customer relationships, increasing our service productivity and innovating our offerings. This should enable us to continue our track record of cash generation and earnings per share growth."

Summary & Conclusion:
Overall seems like a reasonable set of numbers with a small beat on the earnings and dividend front. the shares had a strong run up to the figures and a spike yesterday, so not surprised to see them off a little this morning. In terms of rating it is on about 15x 2014 earnings with a yield of around 2.7% which is about the same as the median for the market according to Stockopedia. This is on the basis of forecasts which suggest growth just into double digits so doesn't seem too bad. The yield is just about OK but not stand out but is covered 2.5x by earnings and the balance sheet seems fine. The operating margin came in at 2.65% so I'd expect it to be on a low Enterprise Value to Sales (turnover) which it is coming in at about 0.29 (900/3072). This seems a tad expensive compared to the margin so I guess it could drift a bit further post the figures given the on going disappointing performance in France. 

Thus I wouldn't suggest you rush out and buy it unless you want exposure to the market / industry they are in. The trend of Companies needing to satisfy and support their IT requirements that got me into this one seems unlikely to go away in the short term, although I guess movement to more cloud based operations could have implications longer term, but will still require advice and support I guess.

For me I'll probably hold it as part of my broader portfolio as nothing has changed dramatically and the outlook seems OK and they have been quite shareholder friendly with a couple of special dividends in the last couple of years. However, if I find something more attractive I could use this as a source of funds. With that in mind in addition to this one there were results from a couple of other Companies that I've held in the past, namely Close Brothers (CBG) and Hill & Smith (HILS), which on a cursory glance seem to be on a lower P/E and Yield than this one so they may be worth checking those out.

---