ii view: business booming at IT firm Kainos

This IT partner of US company Workday continues to see ongoing investment in digital solutions. We assess prospects. 

Full-year trading update to 31 March

ii round-up:

IT provider Kainos Group (LSE:KNOS) today flagged "very strong" trading across both its digital services and workday practice businesses for the full year to the end of March. 

As a result, the FTSE 250 company continues to expect both revenues and adjusted profit to match current City forecasts.

Kainos shares fell by more than 2% in UK trading and are down 40% from November's record high, but they have still more than doubled since pandemic induced market lows in March 2020. Shares for accounting software provider Sage Group (The) (LSE:SGE) are up by around a third since the pandemic, while fellow IT provider Computacenter (LSE:CCC) is up by over 160%. 

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Kainos' digital services business helps customers such as the NHS digitalise written records, while its workday division operates in conjunction with Workday Inc (NASDAQ:WDAY) to deploy its finance, HR and planning software. 

Both new and existing clients had maintained or increased their levels of investment in digital solutions across both businesses over the year. 

The digital services division had continued to deliver major transformation programmes across the Public, Commercial and Healthcare sectors, with international engagements growing in scale, particularly across both Europe and Canada. 

Trading at the workday unit was enhanced via its acquisition of Cloudator. Smart Test, its automated testing platform for workday, continued to expand its international client base, signing a record number of new clients over the year.

Accompanying outlook comments point to a robust pipeline, strong balance sheet and significant contracted backlog as all underpinning management confidence. Full-year results are scheduled for 23 May.

ii view:

Established in 1986, Kainos provides both software and consulting services to governments and corporate customers. The digital services division provides full lifecycle development and support of customised digital services for public sector, healthcare and commercial customers. Its workday practice is one of Workday's most respected partners. As a full-service partner, it is experienced in complex deployment and integrations. Its software suites include cloud-based programmes for finance, HR, and planning. Digital services generated nearly 70% of sales in its last full financial year, with workday practices the balance. 

For investors, a previous warning of increased wage costs pressuring profit margins should not be forgotten. Neither should rising business costs more generally, while an expansion of business overseas brings potential currency headwinds. 

More favourably, exposure to government digitalisation programmes and corporate desire to improve staff efficiency are strong places to be. Bolt-on acquisitions are being found, staff numbers have grown by a third year-over-year, and Kainos does pay a small dividend, offering a yield of 1.7%.

Some caution looks sensible given a backdrop of rising costs, and highly-rated growth stocks like Kainos have been sold off in recent months. But this is a good company, and an estimated analyst consensus target price of over £18 implies room for longer term optimism. 

Positives: 

• Business and customer diversity
• Growing sales overseas

Negatives:

• Backdrop of rising costs
• Corporate spending on IT can be unpredictable

The average rating of stock market analysts:

Strong hold