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Kainos supported by growing backlog

Sales orders surged by more than two-fifths
May 27, 2020

Kainos’ (KNOS) statutory profits climbed up by a tenth through to the March year-end, while orders increased by 42 per cent, leading to a 47 per cent increase in the order backlog to £180m. Despite the solid performance, the software group still felt obliged to suspend its final dividend due to the commercial uncertainties linked to Covid-19. 

IC TIP: Buy at 878p

The digital services division saw revenue increase by 4 per cent to £123m, with contracted backlog up by 48 per cent to £124m. In the public sector, revenues nudged up by 2 per cent to £86.4m, as its last financial year was disrupted by the UK Conservative Party leadership contest, a general election and uncertainty around Brexit. But the group anticipates that its public sector clients will hold up better than other industries during the current crisis, as the UK government pushes ahead with its digitisation programmes. 

Its Workday Practice, which provides cloud-based software for human capital management (HCM), posted revenue growth of two-thirds to £56.3m. Kainos further consolidated its position as a leading Workday provider in Europe, opening an office in Paris to support growth in the French market. Its consultants team grew by over half to 380 people, but Kainos flagged that it anticipates consulting revenues will be more heavily affected by coronavirus, as sectors hit hard by the pandemic are likely to defer or cancel projects.

Indeed, while the software group has not reported a severe impact from the virus so far, management has taken actions to reduce its cost base. It has furloughed some staff, paused recruitment and pulled back all non-essential expenditure, including deferring capital investment connected to its proposed new office in Belfast. 

These are prudential measures, but liquidity hasn't been an issue, partly thanks to an enviable cash conversion rate of 97 per cent. In FY2020, the overall gross margin stood at 47 per cent, supported in part by improved software as a service (SaaS) margins within its automated testing product, Smart. 

Investec forecasts normalised pre-tax profits of £21m and EPS of 13.6p for 2021, compared with £25.5m and 16.6p in FY2020. 

KAINOS (KNOS)   
ORD PRICE:878pMARKET VALUE:£1.07bn
TOUCH:861-904p12-MONTH HIGH:904pLOW: 405p
DIVIDEND YIELD:0.4%PE RATIO:57
NET ASSET VALUE:48pNET CASH:£36.7m*
Year to 31 MarTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201676.614.310.76.0
201783.513.38.96.3
201896.714.310.06.6
201915121.114.39.3
202017923.215.53.5
% change+18+10+8-62
Ex-div:na   
Payment:na   
*Netted against lease liabilities of £4.1m