The FTSE 250‘s Kainos (LSE: KNOS) plunged this morning (2 September) on the release of a disappointing trading statement.
As I write, the Information Technology (IT) provider’s stock is down by more than 15% since the market opened.
That kind of move is uncomfortable for existing shareholders, but is the sudden reduction in price now an opportunity for investors to consider buying some of the shares?
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Revenue slowing, profits held
Today’s update covers the period from 1 April until now and it also contains guidance for the full trading year to March 2025.
The directors reckon overall revenue for the year will likely come in “below current market consensus forecasts”.
That statement probably caused the stock to adjust lower. With any company, the market tends to look ahead. So better forward-looking trading had likely been baked into the share price — pushing it higher — and that may be unwinding now.
However, this isn’t a total disaster of a trading statement. Adjusted profit before tax looks set to end the year in line with expectations. However, there’s been a “tougher” trading environment in the firm’s Digital Services division. That means the directors expect only a “small” increase in overall revenues for the full year.
Growth isn’t as fast as previously expected, but the business isn’t declining. If this slow-down proves to be a temporary setback, today’s lower valuation may be a decent time to run a calculator over the operation.
With the share price near 937p, the forward-looking price-to-earnings rating is in the high teens after accounting for estimates of double-digit percentage growth in earnings ahead.
So this one’s rated as a growth share and may fall further if those profit assumptions fail to materialise.
Valuation-risk is perhaps one of the biggest uncertainties with Kainos because even after today’s fall, the stock’s several floors higher than the bargain-basement.
Growth and opportunity ahead
In the overall business, there’s been a bit of weakness in the Digital and Workday Services divisions. But the Workday Products division “continues to deliver very strong growth”. So it’s a bit of a mixed bag.
However, the directors are looking ahead “with confidence”. There’s a “healthy” pipeline of opportunities and a “significant” contracted backlog, they said. The business is well-positioned in its core markets, and there are “substantial” multi-year growth opportunities for all divisions, they insisted.
On balance, and despite the risks, I reckon it’s a good time to become interested in Kainos. The business is still growing, and it operates in a sector that often produces long-term stock market winners.
My plan now would be to put the shares on close watch with a view to carrying out deeper research. If I can’t find any hidden nasties, this is just the kind of business I’d like to own as part of a diversified portfolio.
We’ll find out more from the company with the half-year report due on 11 November.
