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Sunday share tips: Softcat, Tesco

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The Sunday Times’s Sabah Meddings conceded that Softcat had done well out of the pandemic, but told readers the shares were only a ‘hold’ given their “punchy” valuation.

The information technology infrastructure and software outfit posted a 10.1% jump in sales for the six months to 31 January.

Aside from reselling software from the likes of Apple or Microsoft, the company also offered cloud and cybersecurity services.

Demand for the latter had become increasingly important as employees had been forced to work from home.

Public sector demand had also been boosted by Covid-19.

Furthermore, it had but a 3% share of a fragmented UK market and had no debt.

However, it needed to grow its shares of “customer wallets” from 15% to somewhere nearer 60% by identifying more of the technology that they needed, Meddings said.

To take note of too, its largest supplier, Microsoft, accounted for a quarter of it sales.

Then there was the valuation to a contend with, a “punchy” 42.8 times’ the company’s forward price-to-earnings ratio.

“It has been a winner from the pandemic, but it would take a bullish investor to pile in now. Hold.”

The Sunday Telegraph’s Questor team told its readers to ‘hold’ onto Tesco stock.

Key to their thinking, the grocer’s confirmation to analysts that it was no longer seeing “significant” profit dilution of its in-store sales.

The reason was straightforward, increased online shopping because of the pandemic had allowed greater economies of scale on the digital side by spreading its fixed costs across bigger volumes and more customers.

Clients had also increasingly been opting to use Tesco’s Click and Collect model, thus avoiding delivery costs and boosting profits.

And there was more.

The pandemic had also seen shoppers return to Tesco’s superstores from its German discounting rivals because their size meant shoppers were likely to bunch in particular places inside, the tipster said.

Another key rival, Asda, was less likely to be as aggressive on prices under its new owners.

All told, Questor said, grocers’ high gearing meant that Tesco’s bottom line should get a boost, as even relatively small increases in sales can translate into “big” rises in profits.

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