Impressive Kainos remains a star stock

by Graeme Evans from interactive investor |

Its share price has quadrupled since IPO, but this is a quality company that's still growing fast.

Another landmark in the fast-growing Kainos (LSE:KNOS) story means the IT services company is now being spoken about in the same valuation terms as a select band of global and UK peers.

The comparisons with the likes of Accenture or Emis reflect the company's remarkable record of growth and beating of City estimates as far back as its maiden stock market year in 2015.

We first flagged the company's potential a few months after the 139p-a-share debut - a listing that made millionaires out of staff who had been with Kainos from the outset in 1986. Kainos is one of the longest standing independent technology companies in the UK, having been set up as a joint venture between ICL (now Fujitsu) and The Queen's University of Belfast.

When we returned to the stock last May and September, the shares were trading at around the 400p mark. Today, they touched 600p for the first time as Belfast-based Kainos produced another trademark performance in its annual results.

Adjusted earnings per share (EPS) were up 48% to 15.4p a share for the company's ninth consecutive year of growth, while long-time CEO Brendan Mooney expressed confidence about short and longer-term growth prospects, driven by a 31% surge in sales and strong order backlog.

Source: TradingView Past performance is not a guide to future performance

Analysts at Canaccord Genuity believe there's more to come from the shares, describing Kainos as a "rare combination of quality, growth and earnings upside". They raised their price target to 660p from 590p.

This implies Kainos trading with a price/earnings-to-growth (PEG) multiple of 2.8x, which the broker said was in line with a "select list of quality global and UK peers". The company's PEG is currently at 2.4%, below the industry average of 2.8% and 2.7% for Accenture.

The company's clients are predominantly in the public, health and financial services sectors, with Kainos a leading provider of mobile-enabled healthcare solutions to the NHS. Its role in the UK government's digital transformation programme continues to serve the company well, although in the current climate this may also fuel jitters among investors.

In terms of Brexit, Kainos remains relaxed as it points out that the EU exit could also present growth opportunities due to the impact on over 300 IT systems. In any case, the proportion of revenue from customers outside the UK increased by 44% in 2019.

It added: "In the near term, there is an increased possibility that Brexit, a general election and a spending review all occur within a similar timeframe. Whilst this is unlikely to disrupt in-flight programmes, it may cause the deferral of significant new programmes by a number of months."

Kainos is also Europe's largest boutique Workday partner, helping businesses to implement and optimise their key software. Smart, which is its Software as a Service platform for automated testing of the Workday suite, added global brands including Home Depot and Prudential as customers over the year.

The company remains highly cash generative, leading to a 47% rise in net cash to £42.5 million in the last financial year — equivalent to 6% of market cap. The total dividend was lifted by 41% to 9.3p a share today, with the shares now trading with a projected yield of 1.8%.

Canaccord believes that consensus forecasts for revenues growth of 8-9% over the next two years, alongside 50 basis points margin expansion, looked to be too conservative.

It said Kainos had the potential to grow 10-20% for several years to come, helped by its strong position in the digital transformation market in the UK and momentum in Europe and North America.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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