Kainos is at the forefront of a digital transformation
You won’t find too many businesses and organisations refusing to bow to digital transformation and Kainos (KNOS) is there to help.
It is a built-in-Britain IT business that does three things. First, it helps typically large organisations transition their processes and operations into the 21st Century digital world.
Many UK Government departments employ Kainos, including the Cabinet Office, Home Office, Driver & Vehicle Licencing Agency (DVLA), Department for Transport, Land Registry and the NHS.
The company also provides implementation and testing for users of its Workday enterprise management tools.
The third leg is Evolve, an NHS IT system that includes things like electronic medical records that help streamline the service the NHS can deliver to patients.
Evolve has been muddling along recently, hamstrung by widely reported NHS spending cuts although longer-term Kainos remains optimistic on the opportunity.
And the other parts of the business have been progressing at a blistering pace. In the year to 31 March 2019 its digital services drove revenue growth, up 69% to £132.6m, with momentum in both Workday implementation and on UK Government digital transformation despite Brexit concerns.
Overall Kainos ended up beating original 2019 forecasts of £18.8m of pre-tax profit on £115m revenue by a huge margin, reporting £23.3m and £151.3m equivalent figures.
Kainos is also a very impressive cash machine, with cash matching the company’s £24.4m of earnings before interest, tax, depreciation and amortisation (EBITDA) despite capital spend doubling to £2m. That left Kainos with £42.5m of net cash on the books.
Where Kainos has been clever is in picking and choosing the contracts it bids for and pursuing an organic Workday strategy rather than chasing acquisitions.
IMPRESSIVE TRACK RECORD
Consensus estimates for the year to 31 March 2020 call for £27.5m EBITDA on £165m revenue, which would be its 10th straight year of higher revenue and adjusted pre-tax profit.
At face value this implies slower growth this year but we take the view that Kainos is sensibly managing market expectations with a view to beating estimates, as it did last year.
So while the stock is not cheap, on a 2021 price-to-earnings multiple of about 35, we see multiple catalysts for forecasts to rise and the share price to grow into the rating especially as investors chase reliable growth firms to increasingly full valuations.
Analysts at Canaccord Genuity are convinced that Kainos has scope for several years of 10% to 20% organic revenue growth as an enabler of the digital transformation. We share this confidence.