ii view: star stock Kainos retreats despite resilient trading

Working on digitalising NHS records, this company has proved a 2020 winner to date.

Trading from 1 April to early September

ii round-up:

FTSE 250 constituent and information technology provider Kainos Group (LSE:KNOS) today reported trading which remains in line with management’s full-year forecasts. 

The Belfast headquartered company is digitising NHS patient records along with providing workday or staff efficiency software to companies such as Grant Thornton, United Drug and Travelex.

Trading for both its divisions, digital platforms including work for the NHS, and digital services encompassing its workday offering had remained resilient during the period.

Kainos shares fell 6% in afternoon UK trading having risen by more than 40% year-to-date. Shares for accounting software provider Sage Group (LSE:SGE) are little changed in 2020, while shares for Computacenter (LSE:CCC) are up by more than a fifth.

Kainos operates 15 offices across Europe and North America employing over 1,700 people. Sales orders for its last financial year to the end of March rose by just over 40% to more than £240 million. 

The UK accounted for the lion’s share of 2019 revenues at around three-quarters, with the US generating 12%, and Ireland just under 3%. 

In late July, Kainos declared a special dividend of 6.7p per share, replacing the cancelled final 2019 dividend. It also flagged net cash of over £62 million and no debt. 

First-half results to the end of September are scheduled for 16 November.

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 digital platforms business sells specialised IT platforms in the mobile healthcare and automated testing arenas. 

For investors, resilient trading during a period of pandemic turmoil for many companies is refreshing to see. The prior reinstatement of a dividend via a special payment and an estimated yield of 1% (not guaranteed) is also not to be ignored in an era of ultra-low interest rates. But with an estimated price/earnings (PE) ratio of over 50, above the three-year average nearer to 45, investors might prefer buying on share price dips caused by broader market weakness.   

Positives: 

• Double-digit revenue growth in 2019
• Recommenced dividend payment

Negatives:

• Above 3-year average P/E valuation
• Corporate spending on IT can be unpredictable

The average rating of stock market analysts:

Buy