Bytes capitalises on customer demand

The seemingly permanent shift towards flexible working has sustained customer demand at Bytes Technology Group (BYIT), as has heightened awareness of cyber attacks. 

The software, security and cloud services business reported a 19 per cent increase in gross invoiced income (GII) – to £1.4bn – for the 12 months to the end of February. This shows that organisations are willing to prioritise investment in their IT infrastructure even when market conditions are challenging. 

Management reported continued double-digit growth in both GII and gross profit from public sector and corporate clients last financial year. “This is also reflected in our 18.5 per cent growth in software GII and 30.7 per cent increase in our internal services GII […] the two areas of our business that are key drivers in delivering our growth targets,” said chief executive Neil Murphy.

Employee costs rose by more than 18 per cent to £63.3mn across the year, largely thanks to the hiring of 150 additional members of staff. Meanwhile, the group’s cash conversion ratio for the year (defined as free cash flow divided by the adjusted operating profit) was 84 per cent against a target of 100 per cent.

The group reported negative cash conversion for the first half owing to the timing of customer receipts, though it more than bounced back in the second half. This is more a quirk of timing than anything else: small delays in payment from customers can make the ratio appear worse than it is at a given moment in time. 

FactSet broker consensus puts Bytes’ price-to-earnings multiple at 23.2x for the current financial year – meaning this isn’t a cheap stock even given the contraction in tech multiples. But functioning IT systems are the backbone of any modern business and the company has got into the habit of returning cash to shareholders. Buy.

Last IC view: Buy, 398p, 26 October 2022