Kainos (KNOS) supports government IT infrastructure and is the exclusive UK boutique partner for Workday, a rapidly growing human resources software platform. As the market adapts to a post-coronavirus environment, the company is exposed to the heightened need for cloud operations. Supported by this strategic tailwind, a robust business model and a healthy balance sheet, there’s plenty to like.
Growing software sales in first half
Robust balance sheet with no debt
Workday push into Europe
High ROCE and cash conversion
Kainos’ exposure to Workday derives from its digital services division. Its Workday services provide consulting, project management, integration and post deployment services for Workday’s suite of software. It has customers in both the public and private sector in the UK and increasingly Europe.
As the leading European implementation partner of the US software group Kainos looks very well placed to benefit from Workday’s push into Europe. By broker Cannacord’s estimates, current penetration in the region is around 15 per cent, only a third of levels in the US. The broker forecasts that Workday-related sales will grow at a compound rate of 38 per cent a year to become more than two-fifths of group sales by 2022.
The digital services business generated 85 per cent of revenue in the first half of 2020, growing by 29 per cent year-on-year. As well as Workday implementation, this division development and support of customised digital services for government and commercial customers. The group said in April that it had high levels of backlog for the coming 2021 financial year and growing software-as-a-service (SaaS) orders for its Workday testing software in the first half.
The group’s SaaS revenue is part of the 15 per cent of sales that comes from its Digital Platforms division. Typically recurring software subscription revenues are regarded as more secure than other sales. That said, the group does benefit from a high level of repeat revenues in Digital Services, although Kainos’ consultancy business are likely to be more exposed to the impact of coronavirus, as it affects the company’s ability to dispatch employees to clients.
It is encouraging then that Kainos has been prudent about protecting its cash. It announced in April that it intended to scrap its dividend and pause the development of its Belfast offices. The group has also furloughed staff, frozen recruitment and reduced all non-essential expenditure.
Kainos is a high-quality business, boasting a return on capital employed (ROCE) of 40 per cent and cash conversion that is typically above 90 per cent – although in the first half it only hit 60 per cent due to the timing of some bonus payments and rearranging staff costs. Indeed, it has appeared as one of the top picks in our most recent Alpha Quality screen. On top of this the growth opportunity looks genuine.
|ORD PRICE:||830p||MARKET VALUE:||£995m|
|FORWARD DIVIDEND YIELD:||1.4%||FORWARD PE RATIO:||40|
|NET ASSET VALUE:||49.3p||NET CASH:||£36.9m*|
|Year to 31 Mar||Turnover (£m)||Pre-tax profit (£m)**||Earnings per share (p)**||Dividend per share (p)|
|*Includes lease liabilities of £4.4m|
|**Canaccord forecasts, adjusted PTP and EPS figures|