Belfast-based Kainos (KNOS) is an IT business that basically does three things. First, it helps typically large organisations transition their processes and operations into the 21st Century digital world. Lots of UK government departments employ Kainos to help them do this, and include the Cabinet Office, Home Office, Driver & Vehicle Licencing Agency (DVLA), Department for Transport and NHS, for example.
The company also provides implementation and testing for users of Workday enterprise management tools.
The third leg is Evolve, an NHS IT system that includes things like electronic medical records (EMR), streamlining the service the NHS can deliver to patients.
Evolve is muddling along, hamstrung by widely reported NHS cuts that have pushed budget holders to focus investment on front line services and not modernisation. It’s been this way for a couple of years or more, although longer-term Kainos remains optimistic of the opportunities.
In contrast, Workday and digital transformation projects are going gangbusters, which explains why today’s first half results to 30 September show 62% growth in revenues to £67.2m, and £10.1m of adjusted pre-tax profit, up 42%.
BOLSTERED WORKFORCE
A clue to why profit growth did not keep pace with the top line comes from gross margins, which drifted from 49% to 46%. Investors might also note operating costs, after stripping out share-based payments, jumped 59% to £20.8m.
But this is a consequence of Kainos’ success at winning new business in the half. That’s put a strain on the workforce and meant the company had to tap the contractor market to bolster resources. Contractors are always more expensive than full time staff, but they are also fairly easily managed out again as capacity in the full time team is freed up.
‘The growth rates reported today are some of the highest since the IPO in 2015,’ points out Megabuyte analyst John McCaul today.
‘This has not only been delivered through Kainos's ability to take advantage of buoyant market conditions in areas such as digital transformation within the UK Public Sector, but also by its ability to expand across different regions and expand its services’.
So a short-term negative that looks likely to bode well for the full year and beyond.
Kainos shares nudged 4p higher on Monday to 424p.
