Interactive Investor

Insider: chiefs bet big money on recovery at FTSE 100 and FTSE 250 stocks 

22nd November 2021 08:50

Graeme Evans from interactive investor

A blue-chip just hit a 20-month low and a £2 billion firm suffered a sell-off this month. Too much, say these directors.

The chairman of high-flying FTSE 250 company Kainos Group (LSE:KNOS) has spent £250,000 backing the NHS digital services provider after its shares fell back from their recent record level.

Belfast-based Kainos suffered a rare setback last Monday when the City's concerns over wage-driven margin pressures sent shares as much as 17% lower to 1,735p by the following day.

Tom Burnet, who has been chairman since 2019 after joining the board for its IPO in 2015, bought his 13,865 shares on Wednesday at 1,804p, almost doubling his holding in the process.

The shares closed the week at 1,893p as former Army officer Burnet's display of confidence and some reassuring broker comment encouraged investors back to the stock.

This month's record high of 2,100p compares with 1,218p at the start of 2021 and 139p when the business listed on the stock market with a £164 million valuation.

That listing 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.

The company's 140-plus clients in its digital services division are predominantly in the public, health and financial services sectors, including the Land Registry and Defra. Its work has included supporting the NHS response to Covid-19 and ensuring that clients have been able to provide essential services during the pandemic.

There's a second operation focused on the deployment of Workday's finance, HR and planning software, with clients including ASOS (LSE:ASC) and Germany's Kion Group. In all, Kainos employs more than 2,400 people across 12 offices in Europe and North America.

However, the rising cost of paying these workers along with the elevated use of contract staff and the resumption of some 'in person' expenses has constrained the profit margin at 47.4%, compared with 52.1% the year before.

This performance limited profits growth to 3% at £24.8 million in last week's half-year results, even though the company delivered 33% revenues growth to £142.3 million after another period of strong trading.

Analysts at Berenberg believe markets have overreacted to the margin issue and had missed mitigating factors as well as the acceleration of structural trends supporting the company.

They added: “While labour cost inflation is something investors should be aware of, it should not dominate all thinking around Kainos.”

The broker is backing the positive revenues trends to continue, with significant opportunities for the Workday Practice after revenues growth of 32% in the most recent reporting period.

Berenberg has a price target of 2,100p, while counterparts at Investec Securities believe the shares can reach 2,250p after arguing that the “outlook has never been stronger” with an array of growth avenues.

Investec said: “The group is seeing robust demand across all business lines and has materially ramped up hiring, suggesting underpinned revenues for multiple periods ahead.”

London Stock Exchange – buy, buy, buy

London Stock Exchange Group (LSE:LSEG) chief executive David Schwimmer has increased his holding at a time when the FTSE 100-listed company is under mounting pressure in the City.

Thursday's purchase worth £334,000 was made at a price of 6,680p, compared with levels of more than 9,500p in the early part of this year.

Sentiment has been shaken by LSEG's guidance in March for higher-than-expected costs on the integration of financial data firm Refinitiv, which it acquired for $27 billion in January.

Shares are also down 15% in the month since its third quarter trading update, leaving the forward price/earnings multiple on 22 times compared with 31 times  in March. 

On Friday, UBS analysts said Schwimmer needed to fix investor sentiment within nine to 12 months before a share overhang compounds the negative pressure. Blackstone and Thomson Reuters own 35% and lock-ups on their shares expire between January 2023 and 2025.

UBS said: “While this share overhang is not currently on the radar for most investors, we think it will become a greater concern in the second half of 2022 and the impact of this overhang could be magnified if LSEG remains a "Show-Me" story.”

The Swiss bank, which has a neutral recommendation and 8,150p target price, said cutting  complexity and improving information disclosure would be well received by investors.

The UBS note added: “Interest in LSEG has continued to wane and we see no real positive catalysts emerging in the coming months.

“We expect LSEG's shares to be range-bound between £70 and £85 and think LSEG will need to generate two-to-three consecutive quarters of 5-7% revenue growth (driven by recurring revenues) to shed its status as a "Show-Me" story.”

Schwimmer's salary recently increased by 25% to £1 million in a move that attracted a protest vote at the company's AGM. His shareholding requirement was lifted from 300% to 400% as part of the new pay deal.

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