I’m hunting for quality UK shares as markets continue to be dominated by macroeconomic and geopolitical instability. Kainos Group (LSE: KNOS) is one stock I’m considering buying. Here’s why!
Falling Kainos shares look attractive
In case you’re not familiar with it, Kainos is an IT, software, and consulting firm specialising in digital services and Workday practices.
Its shares have been falling in recent months. Plus, a mixed interim update a few days ago pushed them down even further. However, I’m remaining positive and reckon this could make the shares more attractive.
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As I write, Kainos shares are trading for 1,002p. At this time last year, they were trading for 1,441p, which is a 30% drop over a 12-month period. Since the update, they’ve fallen 18% from 1,232p to current levels.
My investment case
Let’s start by breaking down Kainos’ interim update. Revenue and profit before tax rose by 7% and 12% respectively, compared to the same period last year. Cash on its balance sheet jumped by 13% and an interim dividend hike of 5% was pleasing to see too. So why have the shares slumped since the update, you ask? Well, bookings have dropped 9%. This essentially means it booked less contracts compared to the same time last year. If this continues, the business may struggle and find performance and returns dented.
I’m not going to be fooled into thinking Kainos is on the slide or a stock to avoid due to volatility, tightened spending and a mixed bag of results. I actually thought the overall performance was good. Instead, I’ll look at other positives and fundamentals.
A passive income with a dividend yield of 2.5% is decent. Plus, Kainos’ position as a Workday specialist is intriguing for me, and one that could help the shares soar in the longer term, especially when volatility subsides. The enterprise management software has skyrocketed in notoriety in recent times and its multitude of applications across a number of sectors make it hugely popular. Kainos’ position as one of its biggest European specialists could prove to be fruitful.
Finally, Kainos’ solid balance sheet with lots of cash in its coffers is useful. This is especially the case if economic turbulence continues and it needs to navigate stormy waters.
Final thoughts
It’s worth noting that Kainos shares are a tad expensive despite their recent drop. They trade on a price-to-earnings ratio of 29.
In an ideal world, I’d love to snap up the shares when they’re a bit cheaper. They may well continue to slide, presenting an even more attractive buying opportunity. However, I’d still be willing to buy shares at current levels when I have some investable cash.
I reckon once volatility cools, Kainos – like other UK shares – could land more contract bookings as businesses purse strings are loosened. This could help its revenue, profit, and returns to continue growing.
