ii view: high-flying IT firm Kainos has wings clipped

Digitalising written records and aiding staff productivity, but rising staff costs are hurting. We assess prospects at this Belfast tech company. 

First-half results to 30 September 

• Revenue up 33% to £142.3 million
• Adjusted pre-tax profit up 12% to £29.2 million
• Interim dividend up 11% to 7.1p per share
• Net cash of £80.4 million, no debt

Chief executive Brendan Mooney said:

“Since 2010, we have been helping organisations drive digital transformation programmes. That digitalisation trend has been accelerated by the pandemic and we have continued to support our customers as they respond to changing demands on their organisations.

“While the economy is not yet free of the impacts of Covid-19, our robust pipeline, significant contracted backlog, long-term customer relationships and talented colleagues allow us to be confident in our outlook for both the current financial year and future periods.”

ii round-up:

Digital services and workday practice information technology company Kainos Group (LSE:KNOS) today reported a one-third jump in revenues to £142.3 million as customers continued to invest in their IT solutions.

Adjusted pre-tax profit rose by a more pedestrian 12% to £29.2 million, with the interim dividend pushed 11% higher to 7.1p per share. Gross profit margin fell to 47.4% from a prior year 52.1% as wage increases and more contracted staff added to costs. 

Kainos shares retreated by more than 9% in UK trading, having gained close to 60% year-to-date. Shares for fellow IT provider Computacenter (LSE:CCC) are up by around 15% during that time, and cyber security company NCC Group (LSE:NCC) is little changed.

Kainos’ digital services business helps customers such as the NHS digitalise written records, while its workday practices business helps improve staff productivity. 

Growth in Digital Services remained strong as demand across the Public, Commercial and Healthcare sectors stayed robust. Revenue for the business rose by just under a third to £94.2 million. Healthcare sales grew by 63%, commercial 51% and the public sector a further 6%. 

At its workday practices division, revenue rose by just over a third to £48.1 million, with growth in the Americas staying in focus. US staff numbers more than doubled year-over-year to 249. 

Total group bookings for the half-year to 30 September rose 81% to £187.4 million, while company cash held increased to just over £80 million from £62 million this time last year.  

A further trading update is likely in mid to late January.

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. Workday practices the balance. 

Global group customers now total 601, up 25% since this time last year. Staff and contractor numbers grew 41% year-over-year to over 2,400. Kainos operates across 17 offices in Europe, North America and South America.

For investors, cost pressures on profit margin during the period cannot be ignored. An estimated price/earnings (PE) ratio comfortably above the three-year average also suggests the shares are not obviously cheap. On the upside, exposure to government digitalisation programmes and corporate desire to improve staff efficiency are strong places to be. For now, and while further long-term growth looks likely, elevated costs and an analyst consensus estimate fair value of £18.77 per share offer some reason for caution currently.

Positives: 

• Business and customer diversity
• Growing sales overseas

Negatives:

• Some Covid outlook caution expressed
• Corporate spending on IT can be unpredictable

The average rating of stock market analysts:

Buy