ii view: IT firm Kainos doubles profit in Covid year

It helps the NHS, and active customers have risen by almost a fifth. Buy, sell or hold?

Full-year results to 31 March 

• Revenue up 31% to £235 million
• Pre-tax profit up 117% to £50.3 million
• Cash up 98% to £80.9 million
• Final dividend of 15.1p per share
• Total dividend up 706% to 28.2p per share

Chief executive Brendan Mooney said:

"For the past 15 months we have been physically distant from our colleagues and customers, but we have worked seamlessly together to deliver critical systems. Our work has included supporting the NHS response to Covid-19 and ensuring that our government and commercial clients continued to provide essential services to citizens, customers and employees. 

“Since 2010 we have been helping our customers drive digital transformation. That trend has continued through the pandemic and we have once again delivered a strong business performance.”

ii round-up:

Information technology provider Kainos Group (LSE:KNOS) today posted a doubling in pre-tax profit, as the pandemic continued to boost demand for its services from both the NHS and companies looking to track staff productivity as they remain working from home. 

Pre-tax profit rose by 117% to £50.3 million, with healthcare related sales up 106% and workday productivity revenues up 30%. Unlike last year at the start of the pandemic, the Belfast headquartered company also declared a final dividend of 15.1p per share, making for a total over the year of 28.2p compared to the prior year’s 3.5p. 

Kainos shares drifted marginally lower in UK trading, having gained by more than 130% since pandemic lows in March 2020. Shares for fellow IT provider Computacenter (LSE:CCC) are up by over 150% during that time, while cyber security company NCC Group (LSE:NCC) has also more than doubled in value. 

Sales are split roughly 45% to the public sector, 35% to commercial customers and 20% within the healthcare arena. Active customers over the year rose to 546 from 465 the previous financial year. 

The focus for its digital services division remained within the public sector and healthcare, as it engaged in transformation projects across the UK government and the NHS. The digitalisation of written medical records is an ongoing project. Its workday division has been growing internationally, opening offices overseas. 

Total international sales across its two divisions rose by 48% to £59 million, with North America rising to 16% of the total from a 12% previously. Sales in the UK and Ireland accounted for three-quarters of overall sales, Central Europe 8% and rest of the world 1%. 

Overall, digital service sales rose by nearly a third to £161.6 million, while total sales for its productivity workday division increased by 30% to £73.1 million. The company’s backlog of work rose 15% year-over-year to £206 million.

ii view:

Established in 1986, Kainos provides both software and consulting services to governments and corporate customers. Its staff numbers now total just over 2,000, up from a prior year 1,715. 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.

For investors, cautious management comments highlighting the varying speeds with which different countries and companies are emerging from the pandemic are worth noting. A more than doubling in the share price since March 2020 pandemic lows also suggests a pricing in of considerable good news. 

But exposure to government digitalisation programmes and corporate desire to improve staff efficiency are strong places to be right now. The return of a final dividend payment and 11 consecutive years of financial growth, according to management, add to the positives. In all, and while some caution looks sensible given a possible easing of the Covid tailwind, a current analyst consensus fair value price per share of 1,600p suggests room for further possible upside. 

Positives: 

• Diversifying revenue streams
• Contracted backlog growth of 15% to £206.2 million

Negatives:

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

The average rating of stock market analysts:

‘Buy’