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Looking to invest in IT? I’m watching this FTSE 250 stock for a dip

Belfast-based Kainos Group (LSE:KNOS) is an IT consulting and software solutions company providing digital technology services worldwide, employing over 1,300 staff to deploy its offerings to a growing client base of over 300 customers.

21st Century digital solutions

You may not have heard of it so first, let’s look at what the business does. The FTSE 250 company assists large businesses with the transition of processes and operations from outdated IT systems into the 21st century digital arena and has seen nine years of profitable growth through its main IT services. 

Kainos supports companies that use Workday enterprise management tools (cloud-based applications for finance and HR). Its staff help to integrate Workday’s Software-as-a-Service (SaaS) platform. Testing is possible using Smart, another SaaS offering, which provides automated testing of the Workday suite to ensure everything integrates smoothly, without disruption to clients. Ultimately, this is saving buyers money by streamlining and updating their IT environments. The group is positioning itself as a leading European Workday specialist and has benefited from word-of-mouth recommendations leading to continued growth.

Any downsides? It has a contract with the NHS for an IT system called Evolve, which includes electronic medical records and integrating a better NHS service to patients. Unfortunately, Evolve has suffered setbacks in recent years because of NHS funding cuts and investment priority shifting from modernisation to treating patients.

But besides the NHS, Kainos is employed by many reputable organisations including, the Cabinet Office, Home Office, Driver & Vehicle Licencing Agency and Department for Transport, plus big brands such as Prudential, HP, Netflix and Diageo.

Financial overview

Early shareholders have been rewarded for their confidence in the company. Its full-year results to 31 March showed that adjusted pre-tax profit increased 52% to £23.3m. It confirmed a generous 41% dividend increase and has a dividend yield of 2.1% with cover of 1.5.

A PEG ratio of less than 1 can indicate a stock is undervalued. At 0.9, this is reassuring for Kainos and its debt ratio is an acceptable 0.47. Year-end results were exceptional with revenue growth of 56% to £151.3m, but I imagine it would be a surprise if it replicated such dizzying heights in the coming year.

However, I think growth will continue because it’s actively recruiting, it’s recently opened offices in Paris and Toronto and with continuing cybersecurity worries globally, it’s ideally placed to step in.

Positive sentiment

The firm appears well-rounded, with happy employees (Glass Door gives it a 4.2-star rating from employee reviews). The company is also generating feel-good sentiment and through its skills academy is inspiring the next generation of IT-savvy citizens. In a first-hand customer service environment such as this, happy employees are a necessity for positive customer relations, and it looks to me like Kainos has this sussed.

Although NHS funding cuts are of serious concern to the UK, cybersecurity is also a timely issue, which organisations can’t continue to ignore. When the NHS succumbs to pressure to modernise its IT equipment, Kainos could be in the perfect position to get on with it.

Kainos appeals to me and I would consider buying-in, but as the share price has steadily risen, particularly after the impressive year-end results, the trailing price-to-earnings ratio is now 44, up from 34, 16 months ago. I think it may have a slower climb ahead and I’m waiting to buy on a dip.  

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has recommended Kainos. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.