ii view: shares for FTSE 250 tech firm Kainos plunge

Five-month trading update to 30 August

ii round-up:

IT provider Kainos Group (LSE:KNOS) today warned of lower than currently expected full-year sales given general election uncertainty for public sector projects and continued private sector spending caution.

Full-year sales to late March 2025 are currently expected by analysts to come in at around £415.5 million, up from last year’s £382 million. Kainos now expects a small year-on-year revenue increase, with its estimate for annual adjust pre-tax profit unchanged at around £79.1 million, potentially up from last year’s £77 million.

Shares for the FTSE 250 company fell 14% in UK trading having come into this latest news down around 1% year-to-date. That’s similar to fellow UK IT company Computacenter (LSE:CCC), and below a 7% gain for the 250 index during 2024. 

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Kainos’ digital services division helps customers such as the NHS digitalise written records. It partners with the Workday company in the US to deploy its finance, HR and planning software. 

Despite sustained public sector demand for digital services, some delays around project mobilisation had arisen due to the short-term impact of the UK general election. 

At the Workday business, contract wins and values had been lower than in previous periods with more aggressive pricing seen. However, a return to revenue growth is expected over the second half.

Results for the six months to 30 September are scheduled for 11 November.  

ii view:

Started in 1986, Kainos today works with over 900 private and government-run organisations, employing more than 2,900 people across 22 countries in Europe and the Americas. Digital services, ensuring security, accessibility, and improved user outcomes, accounted for its biggest slug of sales over its last financial year at 56%. Consulting and implementation services for Workday products generated a further 29%, with the sale of Kainos’ own software products complementing Workday products the balance at 15%. Its customers include the UK Passport Office, KBC Bank and Royal London Asset Management.  

For investors, exposure to public sector demand can mean events such as elections impact on the firm, with the uncertain economic outlook still hindering private sector corporate demand. Its partnership and relationship with Workday are of high importance. Costs generally for businesses, and particularly wages, have risen, while growing international sales can suffer currency headwinds. 

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To the upside, a diversity of underlying customer types and geographical regions exists with an emphasis on expanding overseas sales remaining. Kainos’ ability to improve other organisations’ efficiencies within the tough economic environment likely remains important. Investment in its own artificial intelligence (AI) offering has and is being made, while cash of £126 million held as of late March suggests a robust balance sheet.

For now, exposure to technology and a consensus analyst estimate of fair value sat at over £13 per share arguably offers grounds for longer-term hope. That said, more cautious investors are likely to await evidence of healthier sales growth before taking any interest. 

Positives: 

• Business and customer diversity
• Growing sales overseas

Negatives:

• Uncertain economic outlook
• Corporate spending on IT can be unpredictable

The average rating of stock market analysts:

Cautious buy