ii view: UK tech firm Kainos rally unwinds on results day

Full-year results to 31 March

• Revenue down 4% to £367 million
• Adjusted pre-tax profit down 15% to £66 million
• Total dividend for the year up 4% to 28.4p per share
• Net cash held up 6% to £134 million
• New £30 million share buyback

Chief executive Brendan Mooney said:

“We remain grateful for the trust our customers place in us to deliver their critical transformation initiatives. The economic backdrop has affected them and for many, the focus has been on maintaining investment in critical transformation programmes. For others, it has led to reductions or delays in technology expenditure as they navigate an ever-changing business environment.”

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ii round-up:

Kainos Group (LSE:KNOS) today detailed sales and profits that broadly matched management expectations, with the IT provider staying cautious regarding the outlook given continued economic global volatility. 

Annual revenue to late March fell 4% to £367 million, taking adjusted pre-tax profit down 15% to £66 million. Strong demand for software products aimed at increasing business efficiency continued to be more than offset by weak sales of consultancy services. 

Shares in the FTSE 250 company fell 7% in UK trading having come into these latest results down by a close to a quarter over the last year, but up 36% since 9 April. The FTSE 250 index itself is little changed over the past 12 months, while fellow IT company Computacenter (LSE:CCC) is down by close to a tenth. 

Kainos sells products on behalf of US company Workday, as well as providing services in relation to those products and other digital services, such as helping customers like the NHS digitalise written records. 

Overall bookings fell 10% year-over-year to £382.4 million, although activity improved in the second half of the year including low single digit percentage revenue growth during the final quarter.  

Kainos remains confident in opportunities for digital transformation as the public sector, healthcare, and commercial organisations increasingly seek to harness technology, including AI, to improve services for users while reducing the cost of delivery. 

In March, the group cut 7%, or 190 of its workforce, with cost savings being invested into areas including product development, AI, and carefully managed international expansion.

Group net cash held rose 6% year-over-year to £133 million, aiding a 4% increase in the total dividend payment for the year to 28.4p per share and a new £30 million share buyback programme to be executed over the next six months.

A first-half trading update is scheduled for 1 September. 

ii view:

Started in 1986, Kainos today works with over 1,000 private and government run organisations both in the UK and overseas. Digital Services, helping customers to solve their business problems, generated most profit over this latest fiscal year at 41%. That was followed by Workday products, offering products to complement Workday software at 30%, and Workday services involving the deployment of Workday products the balance of 29%. Geographically, the UK & Ireland generated most sales at 59%, the Americas 31%, Central Europe 9% and the rest of the world 1%. 

For investors, government pressure to cut borrowing both here in the UK and overseas, are likely to be dampening demand for digital services. The group’s partnership with Workday is of high importance. Raised trading tariffs could see companies reducing spending and including that on IT requirements, while currency movements can impact financial numbers. 

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More favourably, Kainos' own ability to improve other organisation’s efficiency within the tough economic environment likely remains important. A diversity of underlying customer types and geographical regions exists, with a drive to expand overseas sales ongoing. Investment in its own AI offering is being made, while £133 million of cash held points to a robust balance sheet.

For now, exposure to technology and a consensus analyst fair value estimate above £10 per share look to offer grounds for longer-term hope. That said, more cautious investors are likely to demand evidence of sales and profit growth before taking action.

Positives: 

• Business and customer diversity
• Looking to grow sales overseas

Negatives:

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

The average rating of stock market analysts:

Buy