Shares of FTSE 250 tech company Kainos Group (LSE: KNOS) were getting crushed today (13 November).
As I write, the share price is down 20% to 986p following the release of the firm’s first-half earnings.
Does this sizeable drop present me with an amazing chance to invest in the shares? Let’s take a look.
What is Kainos?
As a quick reminder, Kainos is an IT provider operating three divisions.
- Digital Services supports custom digitalisation services for public sector, commercial, and healthcare customers
- Workday Services specialises in the deployment of Workday’s existing software products to organisations
- And Workday Products develops new products that complement Workday
Immediately, we see how important its relationship is with US-based Workday, the giant human resources software firm. Kainos is an implementation partner and has grown tremendously from this close link.
What just happened?
In the six months to the end of September, the company’s revenue advanced 7% year on year to £193.2m. Adjusted pre-tax profit rose 11% to £37.9m.
Meanwhile, its product annual recurring revenue grew 25% to £55.4m.
The company noted strong public sector revenue growth of 17%. Many of these organisations are undergoing large-scale digital transformation projects, with support from Kainos.
Looking to the full year, the firm says it’s well-positioned to deliver strong margin growth. It also just launched its latest product, Employee Document Management, which already has nine international clients signed up.
Kainos lifted its interim dividend to 8.2p per share from 7.8p. The current yield is 2.4%.
At first glance, these look like solid figures, considering the challenging macroeconcic environment we’re in.
So why is the stock down so much?
Some things to consider
A couple of things seem to have spooked investors.
First, overall bookings in the first half fell by 9% to £202m, down from £221.5m last year. The firm did note that last year’s comparative period included a 125% increase in Workday Services bookings. So there were some tough comparable figures here.
More specifically, there seem to be challenges in its healthcare business, with revenue declining 32% to £20.5m.
“Our healthcare revenues continued their post-pandemic decline and we observed some reductions in project scope for some commercial sector customers within Digital Services,” the firm said.
Kainos’s biggest client has traditionally been the UK government, with projects including the NHS England app. It had already forecast post-pandemic healthcare budget constraints, but this was still a big drop-off.
Will I buy the stock?
Last week, analysts at broker Shore Capital retained a ‘buy’ recommendation on the stock.
They said: “We believe Kainos remains an exceptionally resilient and well-managed company, with strong fundamentals and excellent growth prospects, and is well placed for the emerging generative AI opportunity.”
Despite this setback, I still think the Belfast-based firm has solid long-term growth prospects, especially overseas. It’s targeting government contracts in Canada, which it says is five or six years behind the UK in its digitisation strategy.
However, in the near to mid term, it’s possible that companies and organisations could postpone (or cancel) their digital upgrade projects due to budget constraints.
Meanwhile, the stock still isn’t cheap on a P/E ratio of 30. I’m going to keep it on my watchlist for now.
