Kainos Group PLC (LSE:KNOS) shares topped the FTSE 250 on Monday after it unveiled a £30 million share buyback and reported half-year results two weeks after issuing a profit warning.
The results from the IT products and services provider for the six months ended 30 September showed revenue down 5% to £183.1 million and adjusted profit before tax growth of 1% to £38.2 million.
This was in line with the previously identified headwinds within both the corporate and public sectors it had outlined when it warned on profits at the end of last month.
The company’s full-year outlook remained largely consistent with its previous commentary, with some added detail, with Kainos expecting the majority of the revenue reduction and an impact of additional investment to support its products partnership with Workday to flow through to lower adjusted profit before tax.
"We continue to have a healthy pipeline, ongoing cost discipline, a strong balance sheet and a significant contracted backlog," the company said, though a slight decrease in Digital Services revenue is expected in the remainder of the year and a flat outlook for the next year "as slow UK government decision-making persists, before the new government determines and executes its investment priorities in both central Government and the NHS".
Analysts at Shore Capital noted that management remains cautious about prospects for the remainder of the year but still can boast of robust levels of profitability and are still eyeing substantial growth in the medium term and beyond.
"The recent slowdown in demand for services is a temporary challenge, in our view," said the analysts. "Market conditions will ultimately improve, although it is possible that a favourable shift may not occur until well into next calendar year."
An important factor is that the recent autumn Budget completed the first phase of the 2025 spending review, which resets departmental budgets for 2024-25 and sets budgets for 2025-26.
"This ought to provide departments with certainty – and speed up both the award of new IT projects and client spend on certain committed projects in the short term."
With Phase 1 focusing on “stabilising and supporting public services” and delivering a 4.3% real terms increase in departmental spending of 4.3% per year out to 2025-26, Phase 2, which will conclude in next spring will focus on reform and a "technology-enabled approach" to funding public services while investing in long-term growth.
"From a Kainos perspective, we are encouraged by both the ending of the uncertainty around Phase 1, the real terms increase in departmental spending across 2024-25 and 2025/-26, and the explicit reference to a technology-enabled approach in Phase 2," the Shore Cap analysts said.
"The ongoing prioritisation of digital transformation and modernisation in the public sector (including the NHS) ought to significantly benefit digital transformation specialists such as Kainos in the coming years."
At 796p, Shore Cap said Kainos shares are around a 30% discount to its pre-Covid mean on an EV/EBITDA basis, with this and the P/E multiple also close to 10-year lows and circa 50% below 2023 peak levels.
The analysts, who have a fair value estimate of 1,070p, say they "believe the current price level presents opportunity for investors with a recovery / medium-term mindset".