ii view: IT provider Kainos is still hot property

This company has proved a winner so far in 2020. Here’s why. 

First-half results to 30 September

• Revenues up 23% to £107.2 million
• Pre-tax profit up 100% to £24 million
• Interim dividend up 83% to 6.4p per share

Chief executive Brendan Mooney said:

“We operate in digital transformation markets that have delivered strong growth over many years, which has added to the resilience our business has demonstrated through the pandemic. We anticipate that Covid-19 will continue to accelerate the already strong demand from customers for digital transformation and Workday services as organisations adapt to the changes that the pandemic has brought. 

“Notwithstanding the uncertainty generated by Covid-19, we believe that by concentrating on the needs of our colleagues and our customers, we are well-positioned for further growth." 

ii round-up:

Information technology provider Kainos Group (LSE:KNOS) reported a doubling in half-year pre-tax profit as the pandemic accelerated the need to digitalise written records and improve staff productivity tracking software. 

The Belfast headquartered company is digitising NHS patient records and providing workday or staff efficiency software to companies such as EMC Insurance, Warner Music and Blackberry. Some 97% of Kainos’ own staff are still working from home under the pandemic.

Kainos shares were up over 4% in UK trading, making for a gain of more than 60% year-to-date. Shares for fellow IT provider Computacenter (LSE:CCC) are up by almost a third in 2020. 

Work for its Digital Services division, which currently includes the passport application service at the UK Home Office, generated revenue of £71.4 million, up 16%. UK public sector and NHS related sales account for around 90% of the division's total revenues. Services for the NHS has included aiding with its Covid-19 home testing and track and trace service.

Sales for its Workday division, whose software suites include cloud-based programmes for finance, HR, and planning, rose by 41% to £35.8 million. The number of consultants the division employs increased by 23% to 375 during the period. Sales in the early weeks of the pandemic reduced as companies moved to reduce spending, only to return to more normal levels. 

Sales diversify across its business continued to be pushed. Overseas revenues increased by 54% to £27.6 million and commercial revenues improved by 34% to £39.2 million. Kainos’ overall contracted backlog of work jumped by 38% to £180.9 million. The interim dividend is up 83% to 6.4p per share. 

ii view:

Established in 1986, Kainos provides both software and consulting services to governments and corporate customers. Its digital services business offers full lifecycle development and support of customised IT services. Its Workday business is a leader in test automation. 

For investors, cautious management outlook comments regarding the potential impacts of Brexit and the ongoing uncertainty from the pandemic are worth noting. A gain of 60% in the share price year-to-date could also see some existing shareholders contemplating a little profit taking. That said, exposure to government digitalisation programmes and corporate desire to improve staff efficiency are clearly favourable places to be. A significant hike in the interim dividend payment also appears to underline management’s confidence in the outlook. That may inspire investors of a similar long-term disposition to accumulate holdings. 

Positives: 

• Diversifying revenue streams
• Contracted backlog of work up 38%

Negatives:

• Cautious management outlook comments
• Corporate spending on IT can be unpredictable

The average rating of stock market analysts:

Strong buy