Kainos Group PLC (LON: KNOS) – 104% growth in adjusted pre-tax profit during H1 FY21.

Kainos Group PLC (LON: KNOS) is a leading IT services provider based in the UK, focused on delivering IT solutions for the last 30 years and currently employs around 2,000 people across 12 offices in Europe and North America. KNOS is headquartered in Belfast. Moreover, the Company operates across two business areas –. Digital Services and Workday Practice. KNOS is listed on the FTSE 250 index. Some of the most prominent clients of KNOS are shown below –

(Source: Company presentation)

On 24 May 2021, KNOS will release full-year results for the twelve months ended 31 March 2021.

 (Source: Company presentation)

Recent trend of dividend payments

KNOS had paid an interim dividend of 6.4 pence per share on 18 December 2020, while the ex-dividend date was 26 November 2020. The Company had already paid a special dividend of 6.7 pence per share on 04 September 2020 due to the strong business performance.

Technological Trend and Advancement

The Company would accelerate R&D investments in areas such as Intelligent Automation through AI (“Artificial Intelligence”) and Machine Learning, Smart Environments including IoT (“Internet of Things”), Edge Computing & next-generation networking, and Cloud-Native computing. Moreover, the Company had created one of the largest Adaptive Insights practices globally. During FY20, KNOS had completed the acquisition of three leading Adaptive Insights consulting organisations: Formulate Implexa and IntuitiveTEK. These three acquisitions contributed around £1.1 million of revenue for the Group during FY20. Furthermore, the Company has an innovative Software-as-a-Service platform, Smart, for automated testing of the Workday suite under the Workday Practice business segment. 

Growth Prospects and Risk Assessment

The Company would continue to deliver significant programmes in partnership with the UK government and with leading commercial & healthcare clients. Moreover, the public sector clients had contributed around 46% in total revenue, 37% was contributed by the commercial sector, and the remaining came from the healthcare industry during H1 FY21. For the Workday Practice division, KNOS would continue to hold the reputation of the leading European partner for clients that are choosing Workday’s innovative Software-as-a-Service platform to support their finance requirements.

(Source: Company presentation)

The Global workday automated testing market has an estimated addressable market of around £338 million.

KNOS is undergoing several significant risks as the profitability, and cash flow of KNOS might get impacted due to the software bugs or lack of availability of hosted services. KNOS is also exposed to the risk of inability to deploy Customer requirements for services to comply with contractual requirements in a timely manner. The failure of partner relationships could adversely impact the business in the near term. KNOS also has a risk of intellectual property infringement. 

After understanding growth prospects and risk assessments, we will analyse some key fundamental and shareholders statistics of Kainos Group PLC.

Trading Update (as of 16 April 2021)

The number of employees and contractors had shown an increase of 309 and reached 2,024 people by the end of March 2021. KNOS had witnessed increased demand from existing and new customers across both business segments.

H1 FY21 Financial Highlights (for six months period ended 30 September 2020, as on 16 November 2020)

(Source: Company result)

• The Company had shown around 23% growth in the revenue to £107.2 million during H1 FY21, boosted by the digital transformation initiatives taken by several clients.
• On the profitability front, the Company had shown more than 100% improvement in the adjusted pre-tax profit to £26.1 million during the period.
• KNOS had shown significant growth in cash conversion ratio as it stood around 123% for the period, while it was 60% during H1 FY20.
• Meanwhile, KNOS had strengthened its financial position as it shown around 51% growth in the cash balance from £41.3 million during H1 FY20 to £62.5 million during H1 FY21. 

Financial Ratios (H1 FY21)

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 07 May 2021, at 08:47 AM GMT, KNOS’s shares were trading at GBX 1,467.00, down by 0.47% against the previous day closing price. Stock 52-week High and Low were GBX 1,718.00 and GBX 677.97, respectively.

KNOS' prices are trading in an ascending channel pattern for more than a year and currently approaching the lower band of the channel. The trend-following indicators 21-period SMA and 50-period SMA are sustaining below the current market price and providing support at the lower end.

In the last one year, KNOS’s stock price has delivered a positive return of ~94.70%; and it has outperformed the FTSE All-Share Software and Computer Services index with a return of around 16.47% and the FTSE 250 index with a return of about 39.27%. 

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

KNOS had delivered resilient financial performance during H1 FY21 across both business segments. Moreover, KNOS had maintained the positive momentum during H2 FY21 as well. The Company had anticipated FY21 results to remain at the upper end of current market forecasts. Furthermore, the business was boosted by increased demand levels from existing and new clients as several companies underwent digital transformation initiative during FY21. Under Digital Services, KNOS carried the momentum of long-term engagements of the UK’s Governments transformational programme, including NHS ventures. However, the Company remained cautious of the various operational headwinds caused by the Covid-19 pandemic. Nonetheless, KNOS remained confident regarding the outlook driven by robust pipeline, strong balance sheet and significant contracted backlog. Overall, the Company is well-positioned to accelerate the growth trajectory through several strategic developments.

Considering the interim dividend growth, strong balance sheet, significant contracted backlog, robust profitability growth, strong pipeline, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Kainos Group at the current price of GBX 1,467.00 (as on 07 May 2021 at 08:47 AM GMT), with lower-double digit upside potential based on 50.11x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*The dividend yield is subject to change as per the stock price movement.

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