Kainos Group PLC – Overstretched amid macro-economic uncertainties. 

Kainos Group PLC (LON: KNOS) is a FTSE 250 listed Company, which provides IT services across two business divisions, namely Workday Practice and Digital Services. 

On 24 May 2021, KNOS expects to provide its full-year results for FY21.

Investment Rationale – Expensive at GBX 1,224.00

• From a technical perspective, 14-Day RSI (56.00), reflecting a significant downward trend.
• Over the past four years (FY16 to FY20), KNOS’ gross margin has remained below the industry median. In H1 FY20, gross margin was 52.10%.
• The Covid-19 pandemic continued to create material uncertainties for the trading environment.
• The near-term economic climate can impact the medium-term outlook by impacting the disposable income of the customers.
• Over the past three months, KNOS’ stock price has given a return of merely 1.54%, while the FTSE All-Share Technology index has yielded a relatively better return of 2.37%, reflecting underperformance against the benchmark sector.

Risk Assessment

• EU Exit and Covid-19 uncertainties continued to create a challenging operational environment.
• The macro-economic disruption can also impact consumer confidence and their spending capacity.

Recent News

21 December 2020: Rosaleen Blair CBE was appointed as a Non-Executive Director, with effect from 01 January 2021. He will join the Nominations and Remuneration Committees as a member.

Trading Update (as on 22 January 2021)

• KNOS continued to deliver a solid trading performance, and hence, it expects to close FY21 with better results than market projections.
• Under Digital Services, it carried the momentum of long-term engagements of the UK’s Governments transformational programme, including NHS ventures.
• It also continued to win new contracts under the Workday Practice division.
• Looking ahead, the Group has substantial contracts backlog, robust pipeline and strong balance sheet to pursue market opportunities.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Although the Company remained confident in its outlook with its robust pipeline and substantial contracts backlog, it remained cautious regarding the uncertain macro-economic challenges and Covid-19 mayhem. Moreover, the stock is trading nearly at 52-week high, reflecting overbought and overstretched situation. Therefore, the upside potential is sceptical as the economy is yet to adapt post Brexit environment. Stock 52 week High and Low were GBX 1,392.00 and GBX 453.84, respectively.

Given the heightened level of uncertainties, we recommend an “Expensive” stance on Kainos Group PLC at the current price of GBX 1,224.00 (as on 28 January 2021, before the market close at 8:00 AM GMT), while we look forward to reviewing the support from upcoming catalysts.  

*All forecasted figures and Peers information has been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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