ii view: why Kainos shares just surged 20%

Digitalising written records for governments and helping companies improve staff efficiency. Buy, sell, or hold?

Full-year results to 31 March

• Revenue up 29% to £302.6 million
• Adjusted pre-tax profit up 3% to £59 million
• Final dividend of 15.1p per share
• Total ordinary dividend for the year up 3% to 22.2p per share
• Net cash down 5% to £76.6 million

Chief executive Brendan Mooney said:

“That sustained demand, and the trust that our customers have placed in Kainos, has allowed our business to thrive and this year we continued to pass significant milestones.

“Looking forward, we remain confident in our business as the demand for our services has never been higher, our reputation for delivery continues to flourish, while the scale and capability of our organisation continues to grow at pace.”

ii round-up:

IT provider Kainos Group (LSE:KNOS) today detailed results in line with its recent trading update and offered a confident outlook, as the pandemic accelerated the need for organisations to invest in their digital capabilities. 

The Belfast headquartered company increased its customer numbers by more than a third year-over-year to 731, helping push revenues up by 29% to £302.6 million. Sales generated overseas rose 48% to £87 million as management continued to pursue diversity of both customer sectors and geographical regions. 

Kainos shares rallied by more than 20% in UK trading having fallen by over 40% year-to-date coming into these results. Shares for UK industrial automation software maker AVEVA Group (LSE:AVV) are down by around 36% during 2022, and the tech heavy American Nasdaq Composite index has fallen by 27% year-to-date as investors have fretted over future growth rates in the face of rising interest rates. 

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

Adjusted pre-tax profit rose by a more sedate 3% to £59 million compared to revenues as costs including those for product development increased. Personnel numbers across 22 countries rose to almost 2,700 from 2,024 a year ago. 

Accompanying management outlook comments pointed to demand for its services having never been higher. These latest annual results provided its twelfth consecutive year of growth in terms of staff, customers, revenue, and profitability.

The total ordinary dividend payment for the year, excluding last year’s special dividend payment, rose 3% to 22.2p per share. 

ii view:

Established in 1986, Kainos provides both software and consulting services to governments and corporate customers. The digital services division provides full lifecycle development and support of customised digital services for public sector, healthcare and commercial customers. Its workday practice is one of workday's most respected partners. As a full-service partner, it is experienced in complex deployment and integrations. Its software suites include cloud-based programmes for finance, HR, and planning. Digital services generated around two-thirds of overall sales in this latest financial year. Workday practices the balance. 

For investors, a more than one-third increase in operating costs compared to the prior year cannot be ignored. Increased travel expenses, not suffered during the pandemic, played their part. Rising business costs more generally are also worth remembering, as are potential currency headwinds given a growing amount of business conducted overseas. 

On the upside, exposure to government digitalisation programmes and corporate's desire to improve staff efficiency are strong places to be. Bolt-on overseas acquisitions that strengthen its Workday business have also been made. On balance, and while some caution looks sensible given a highly uncertain economic outlook, an estimated analyst consensus price target of close to £17 implies confidence in the business over the longer term. 

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:

Strong hold