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Digital transformation is one of the few growth sectors left in the economy. Companies are cutting back on marketing and real estate but continue to spend on IT.
At first, it was the pandemic-induced rise of work from home that pushed companies to bring forward spending. Now it is the promise of artificial intelligence.
IT services provider Bytes Technology is a beneficiary of this push. In the 12 months to February, its gross invoiced income rose 19 per cent to £1.4bn. The company has credited this performance on increased demand for cloud services and improved cyber security.
This growth is also dropping through to earnings, with operating profit rising by 20.6 per cent.
Bytes could also be an under-the-radar beneficiary of the AI hype. If companies want to use their data effectively, they will need to move it to external servers and Bytes is one of the leading partners of Microsoft Azure in the UK.
However, in the short-term there could be a slight slowdown in growth as companies limit their spending. Amazon, Google, and Microsoft are all still growing their cloud revenues at around 20 per cent or more but this is a step down from the 40 per cent rates of previous years. On top of this, cyber security companies such as Darktrace and NCC have all noticed weakening demand.
This recent trend might explain why chief executive Neil Murphy deemed it a good time to sell £4.75mn worth of shares.
The sale was for “personal and family estate planning purposes”, the company said, adding that Murphy remained committed to the business and does not plan to sell any of his remaining shares over the next 12 months.
The FactSet broker consensus is forecasting a 5 per cent EPS growth to 19.8p next year, but this still leaves the shares trading on an expensive-looking forward price-to-earnings ratio of 25.
THG directors buy in
THG shares have lost 85 per cent of their value since they floated in 2020 as the e-commerce company, which owns beauty and nutrition brands and provides digital services through its Ingenuity division, has consistently disappointed the market with profit warnings and concerns around corporate governance.
Recent board updates have improved the governance situation, although disquiet amongst shareholders remains. Co-founder and chief executive Matthew Moulding has given up his “special share” arrangement, which allowed him to veto takeovers. The share will be cancelled.
The board has also been buttressed by the appointment of Premier Foods and Fuller, Smith & Turner remuneration committee chair Helen Jones as another independent non-executive director. But question marks remain about Iain McDonald, the founder and chief investment officer of Belerion Capital, which was involved in a potential bid for THG in 2022. McDonald has stepped down from the remuneration committee but almost a quarter of votes at the company’s annual general meeting on June 21 were cast against his re-election to the board because of independence concerns.
THG said in pre-AGM trading update that it had a “strong” second quarter and kept its guidance unchanged. Management expects adjusted cash profits for financial year 2023 to be in line with the analyst consensus of £118.5mn, forecasts which indicate a margin of 5.3 per cent.
Liberum analysts said that margin improvement “appears achievable given the significant tailwinds from whey price declines which should fully benefit [the company in the second half of the year] and ongoing efforts to reduce costs in the business”.
Board members also seem confident about the prospects of a share price improvement. Co-founder and chief operating officer John Gallemore bought £448,000-worth of shares in joint names with his wife on the same day as the AGM. Non-executive director Sue Farr and her husband bought a total of £50,000-worth of shares the following day.