Berenberg: UK Software Undervalued Amid AI Fears, Initiates 'Buy' on Alfa and Ocado

Analysts at Berenberg initiated coverage on Alfa Financial Software (ALFA) and Ocado Group (OCDO) with "buy" ratings, stating both companies have been caught in a sector-wide valuation decline driven by fears of artificial intelligence disruption, despite no fundamental deterioration in their businesses.

Sector-Wide De-rating

According to Berenberg, valuations in the UK software sector remain depressed, creating a potential opportunity for investors. The firm noted that the UK Software Index is trading at 10.0 times enterprise value to EBIT (EV/EBIT), which is below the FTSE All-Share Index's multiple of 10.7 times.

This valuation pressure persists even as revenue growth estimates for the sector are rising for the next two unreported fiscal years and aggregate EBIT margins have held broadly stable, the investment bank said.

Analyst Calls

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Berenberg highlighted two specific companies where it sees value despite the market's AI-related concerns:

• Alfa Financial Software (ALFA): Analysts see the asset finance software provider's subscription revenue accelerating on the back of new customer wins. Berenberg forecasts EBIT margins will recover to 30% in fiscal 2028 from an estimated 28% in fiscal 2026. The firm noted Alfa trades at a 7% free cash flow yield based on its estimates.
• Ocado Group (OCDO): For the grocery technology firm, Berenberg pointed to two customer wins in 2026 as evidence of improving momentum. The bank expects that a combination of lower R&D spending and a reduced cost base will help Ocado achieve positive operating cash flow. It also noted that if Ocado meets its cost-reduction targets, its Technology Solutions segment could achieve a 40% EBITDA margin in fiscal 2027.

Valuation Methodology

Berenberg's analysis of Alfa utilized a 50/50 blend of discounted cash flow (DCF) and relative multiples, using a weighted average cost of capital (WACC) of 10.5%. For Ocado, the valuation was based on a 50/50 mix of DCF, with a 9.9% WACC, and a sum-of-the-parts model. The latter applied a 12 times fiscal 2027 EV/EBITDA multiple to its Technology Solutions division, which Berenberg said reflects execution risk.