ii view: some good news from IT firm Kainos

This FTSE 250 company has fallen by over a quarter year-to-date. Buy, hold, or sell? 

Trading update from 1 April

Group management said:

“While we are cognisant of the global macroeconomic landscape, our robust pipeline, strong balance sheet and significant contracted backlog underpin our confidence in our outlook.  As a result, we believe that we are well-positioned for further growth and remain confident in our strategy.”

ii round-up:

IT provider Kainos Group (LSE:KNOS) today detailed continued strong trading across both its divisions as new and existing clients maintained high levels of investment in digital solutions.

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Full-year results to the end of March are expected to prove in line with current City forecasts, with revenue expected to come in at between £335.7 million and £373.4 million. Adjusted pre-tax profit is seen at between £62.7 million and £66.5 million. These numbers compare with sales of £302.6 million and profit of £59 million in its last financial year. 

Kainos shares rose by around 1% in UK trading having come into this latest announcement down by around 30% year-to-date. Shares for rival IT services provider Softcat (LSE:SCT) are down by a similar amount in 2022, while UK industrial automation software maker AVEVA Group (LSE:AVV) is down around 18%. The tech heavy US Nasdaq Composite index is down by close to a quarter year-to-date as investors continue to fret over future growth prospects in the face of rising interest rates.

Kainos' digital services business helps customers such as the NHS digitalise written records while its workday division works in conjunction with Workday Inc Class A (NASDAQ:WDAY) to deploy its smart audit, HR and planning software. 

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Digital Services teams for the Belfast headquartered company continue to deliver major transformation programmes to new and existing clients across the Public, Commercial and Healthcare sectors.

Its Workday business continues to benefit from its established global presence and reputation, helped by the recent awarding of a Workday phase 1 Prime Status Partner in the US. 

First-half results are scheduled for 14 November. 

ii view:

Employing more than 2,600 people across 20 offices in Europe and the Americas, Kainos provides both software and consulting services to governments and corporate customers. Its digital services division offers full lifecycle development and support of customised digital services. Its workday practice is one of Workday's most respected partners. Digital services generated around two-thirds of overall sales in its last financial year, with Workday practices contributing the balance.

For investors, a highly uncertain economic outlook offers caution. Previously reported rising costs are also worth remembering, with rising travel expenses playing a part after a significant fall during the pandemic. Rising business costs more generally and for its own customer base warrant consideration, as do currency headwinds given a push to grow business overseas. 

More favourably, robust customer demand continues to be seen. Exposure to government digitalisation programmes and a corporate desire to improve staff efficiency remain solid places to be, while bolt-on overseas acquisitions to strengthen its Workday business have been made.

For now, and while some caution looks sensible given the highly uncertain economic outlook, an analyst consensus target price of over £15 per share implies room for a little upside longer term.

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:

Buy