ii view: IT firm Kainos gets big thumbs up

It's helping customers improve efficiency and is expanding its overseas sales. Buy, sell, or hold?

Full-year results to 31 March

• Revenue up 24% to £375 million
• Adjusted pre-tax profit up 15% to £67.6 million 
• Cash of £108 million, up from £77 million
• Total dividend for the year up 8% to 23.9p per share

Chief executive Brendan Mooney said:

“Our performance as a business is influenced by many factors, but it is our relationships with our customers and the talents of our colleagues that are the key drivers. The strength and depth of both have continued to grow this year and we are grateful for the trust and confidence that our customers continue to place in Kainos and the expertise, experience, and energy of our colleagues, who have been the driving force behind all that we have achieved.”

“Alongside our confidence, we also have a sense of excitement - technology continues to develop at pace and the positive impact it can have on people's lives increases. It is energising to be at the forefront of these developments."

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ii round-up:

IT provider Kainos Group (LSE:KNOS) today detailed robust demand across all its services both in the UK and overseas, pushing key financial metrics up for a 13th consecutive year. 

A near one-quarter increase in full-year sales to £375 million fed through to a 15% improvement in adjusted pre-tax profit to £67.6 million, underpinning an 8% increase in the total full year dividend payment to 23.9p per share. 

Shares in the FTSE 250 company rose by 6% in UK trading having come into this latest news up by close to a fifth over the last year. Accountancy software provider Sage Group (The) (LSE:SGE) is up nearer 30%, while the FTSE 250 index itself is down by close to 3%. 

Kainos works with over 800 private and government run organisations, helping them to either transform the delivery of their services via enhanced systems, or in deploying the products of partner Workday in providing smart audit, HR and planning software to improve efficiency.

Workday related sales climbed to £150.4 million from the prior year’s £102.8 million, with customers assisted including Shopify in Canada, ASOS (LSE:ASC) in the UK and Match.com in the US.

Digital Services related sales totalled £224.4 million, up from the prior year’s £199.8 million. Organisations it helped included the NHS, Allied Irish Bank and the UK Department for Environment Food and Rural Affairs. 

Overseas sales rose 52% to £132 million to leave total international revenues at just over a third, while staff numbers climbed to almost 3,000 from the prior year’s 2,692.

A trading update is likely in early September. 

ii view:

Started in 1986, Kainos today operates offices across more than 20 countries in Europe and the Americas. It provides both software and consulting services to organisations across the public, commercial and healthcare sectors. Its digital services division offers full lifecycle development and support of customised digital services, while its workday practice is one of Workday's most respected partners. The UK & Ireland generate its biggest proportion of sales at 65%, followed by North America at 25%, Central Europe at 9% and the rest of the world 1%. 

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For investors, the tough economic backdrop including higher interest rates needs to be remembered. Costs generally for businesses remain elevated, its partnership with Workday is of high importance, while growing international sales can suffer currency headwinds. 

On the upside, Kaino’s own ability to improve other organisation’s efficiency within the tough economic environment likely remains significant. There's diversity of both underlying customer types and geographical regions, bolt-on overseas acquisitions to strengthen its Workday business have been made, while overseas sales are growing. 

On balance, and while some caution looks sensible given the highly uncertain economic outlook, a current analyst consensus estimate of fair value sat at of over £15 per share arguably implies grounds for ongoing longer-term optimism. 

Positives: 

• Business and customer diversity
• Growing sales overseas

Negatives:

• Highly uncertain economic outlook
• Corporate spending on IT can be unpredictable

The average rating of stock market analysts:

Strong hold