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Kainos delivers double-digit growth

Customers are pressing ahead with digital transformation projects, according to the IT group
May 22, 2023
  • Improvement in cash conversion
  • Lower valuation

There is a lot to like in Kainos’ (KNOS) full-year results. Economic volatility means its customers are “urgently” trying to transform their digital operations, and this has translated into excellent top-line growth at the IT services group. Revenue increased by 24 per cent year on year to £375mn, and the lion’s share of this was achieved organically.

The group’s Workday arm - which helps customers deploy and test their Workday (US:WDAY) software, in partnership with the US company - is the key driver of sales growth. As such, the group invested heavily in Workday sales and product development. This caused operating expenses to leap ahead of revenue growth, but the group’s operating margin remained steady at 14.1 per cent. 

Other metrics were also strong. Cash conversion jumped from 83 per cent to 104 per cent; employee retention edged up from 86 per cent to 88 per cent; and existing customer revenue increased by 26 per cent to £337.6mn. 

According to analysis by Stifel, sales growth decelerated in the second half of the year, from 26.4 per cent to 21.6 per cent. The slowdown was driven by the group’s largest division, digital services. However, momentum still looks strong, with bookings up 22 per cent year on year at £423mn. 

Kainos has been trading on an “eye watering” premium for the past two years, according to Stifel, and it’s still pretty pricey. However, the company's forward price-to-earnings ratio of 26.2 is significantly lower than its five-year average of 35.4. We would like a little more visibility around future revenue growth, but the group is certainly looking more tempting. Hold. 

Last IC View: Hold, 1,495p, 14 Nov 2022

KAINOS (KNOS)    
ORD PRICE:1,266pMARKET VALUE:£ 1.6bn
TOUCH:1,263-1,269p12-MONTH HIGH:1,760pLOW: 955p
DIVIDEND YIELD:1.9%PE RATIO:38
NET ASSET VALUE:104p*NET CASH:£107mn
Year to 31 MarTurnover (£mn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201915121.114.39.30
202017923.215.53.50
202123550.332.528.2
202230346.029.122.2
202337554.333.623.9
% change+24+18+15+8
Ex-div:28 Sep   
Payment:20 Oct   
*includes intangible assets of £22.8mn, or 18p per share