Business Overview
Kainos Group Plc (LON: KNOS) is a Software & Computer Services company providing digital products and services to its clients from financial services, healthcare and government sectors. The company divided its operations into two reportable segments being Digital Platforms and Digital Services. The company presently has over 1,400 employees catering to the needs of more than 350 global customers.

Recent News
On 28th November 2019, Kainos Group announced the selection of Katie Davis as Independent Director Non-Executive.

Financial Highlights – H1 Financial Year 2020 (30^th September 2019, GBP, million)

(Source: Interim Report, Company Website)
 
In the first half of the financial year 2020, the company’s revenue increased by 29 per cent to GBP 86.9 million as against GBP 67.2 million in H1 FY2019. The increase in the revenue was due to good performance by Digital Services business for the period. In the first half of the FY2020, the company’s gross profit was at GBP 40,380 thousand as against GBP 30,822 thousand in H1 FY2019. The company’s operating profit increased to GBP 11,846 thousand in H1 FY2020 from GBP 8,699 thousand in H1 FY2019. The company’s adjusted PBT (Profit before tax) increased by 27 per cent to GBP 12.8 million in H1 FY2020 from GBP 10.1 million in H1 FY2019. The company’s PBT (Profit before tax) increased by 38 per cent to GBP 12 million in H1 FY2020 from GBP 8.7 million in H1 FY2019. The Profit for the year increased to GBP 9,633 thousand in H1 FY2020 from GBP 6,960 thousand in H1 FY2019. The company’s basic earnings per share stood at 8.0 pence in H1 FY2020 as against 5.9 pence in H1 FY2019. The company’s diluted earnings per share stood at 7.9 pence in H1 FY2020 as against 5.7 pence in H1 FY2019.

Share Price Performance

Daily Chart as of  January 3^rd, 2020, before the market close (Source: Thomson Reuters)

Kainos Group Plc shares were trading at GBX 753.84 at the time of writing before the market close (at 1:56 PM GMT) on 3^rd January 2020 and were down by 4.09% versus the previous day closing price. Stock's 52 weeks High is GBX 804.00 and Low is GBX 340.10.

Valuation Methodology

*Peers: IQE Plc, FDM Group (Holdings) Plc, SDL Plc, Paypoint Plc and Micro Focus International Plc.

Conclusion
The company has shown good financial performance in the first half of FY 2020. The company hadnot been able to control its operating and non-operating expenses effectively, which may result in a decline in profitability in the coming years.

As the company operates inmultiple geographies, its profits can be impacted negatively due to foreign exchange rate fluctuations. The group faces a risk of fines and investigations which can impact the future growth as it operates in an industry which is subject to the adverse regulatory headwinds, breaches of which can be potentially fatal for the group.

The company’s operations can be affected negatively due to ongoing uncertainties created over the Brexit, as it would disturb the supply chain. The prevailing uncertainty had made it difficult for the company to predict the outcome of investments made.

Being a technology company, KNOS needs to invest heavily in innovation and system maintenance and, any failure to do so will impact the brand royalty and may affect the company’s financial performance. The company’s EV/EBITDA, Price/Earnings and Price/Cash flow multiples are significantly higher as compared to the industry multiple, reflecting overstretched valuations.

Based on the risks associated and support from valuation done using the above method, we have given a “Sell” recommendation at the closing price of GBX 786 (as on 2^nd January 2020), based on 42.18x NTM Price/earnings (approx.) on FY20E earnings per share (approx.).
 
 
*All forecasted figures and peers have been taken from Thomson Reuters.
*The “Sell” recommendation is valid for the current price as covered in the report (as on 3^rd January 2020).

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