With the January trading updates out of the way, we examine the outlook for the UK tech sector. As we entered January, the mood among investors was downbeat, given the tepid economic outlook, the changes announced in the UK Autumn budget, combined with the ongoing geopolitical uncertainties. However, the January trading announcements, across the sector, were better than expected, with two earnings outlook upgrades to every downgrade, on our estimates. While uncertainties prevail, including over the US regime transition and trade wars, attractive business drivers remain in place, and we see an increased opportunity for upgrades as the year progresses.
We entered January with an air of pessimism, given the political and economic backdrop. However, generally, trading news has been healthy across the tech sector. Most companies, across the sector, have significant international exposure and are not reliant on the UK economy, and some benefit from the strengthening US dollar. One company that is UK-focused is Fintel, which estimates that it will have an additional £0.65m of costs as a consequence of the increase in employers’ national insurance (NI) contributions that was announced in the budget. This equates to ca.3% of adjusted EBITDA, and Fintel says it is making the necessary steps to absorb these costs.
We examined trading updates and earnings announcements during January on 104 UK tech-related stocks of all sizes, the vast majority being small caps. Based on commentary (including profit beats/misses, as well as new business wins and outlook statements), we estimate that these announcements resulted in 36 elevations to forward earnings expectations, compared with 13 likely decreases.
Notable positive surprises came from Quartix, Filtronic, Concurrent, SRT Marine, Alphawave Semi, Luceco, IQE, Microlise, Eleco, Dialight and Alfa Financial Software. In addition, some companies rallied after trading was not as bad as some investors had feared. For instance, Computacenter shares made solid gains after it announced that it expects FY’24 adjusted profit before tax to be at the low end of analysts’ forecasts, and the news also led to small cuts to forecasts for FY’25 and FY’26.
