Those holding shares in Kainos Group (LSE: KNOS) have done rather well lately. The digital services and platforms provider has considerable operational momentum, and at today’s 607p, the stock is up just over 50% since the beginning of the year.
I’d describe today’s full-year figures as “stonking”. Revenue rose 56% compared to last year and adjusted diluted earnings per share shot up 48%. The company isn’t troubled by having any borrowings and the cash position put on a healthy 47% to £42.5m. The directors endowed the firm’s shareholders with a chunky 41% increase in the total dividend for the year.
Great performance, a full valuation
Indeed, total returns for shareholders have been robust from both capital gains and from dividend income. The one ‘catch’ for those considering entering a position in the shares today is the valuation. The forward-looking price-to-earnings ratio for the trading year to March 2020 is just under 35, but that does drop down a little to below 33 if you account for the cash pile – but that’s still a rich valuation.
Meanwhile, City analysts have pencilled in a modest-looking double-digit percentage increase in earnings for next year, suggesting today’s fireworks display in the figures may not be repeated as dramatically.
What’s been going so well? The company’s digital services business includes lifecycle development and support of customised services for government and commercial customers. Kainos reckons it is “the leading boutique partner” for Workday in Europe, responsible for implementing the US company’s Software-as-a-Service (SaaS) platform, such as in the areas of mobile healthcare and automated testing for the NHS and others.
Strong progress abroad
The directors point out in today’s report that the company has achieved nine consecutive years of revenue and adjusted profit growth, which they put down to success in winning projects with new and existing customers. Sales orders in the period rose 31% and the contracted backlog of orders increased by 10% to just over £122m, which provides good visibility for progress going forward.
Around 19% of the firm’s business came from abroad with foreign revenues rising 44% in the period, suggesting Kainos is making advances rolling out its offering beyond UK shores. The outlook is positive and the directors think the firm’s operational progress is a decent platform for further growth from where we are now.
There’s a lot to like about the company, but I can understand investors being wary about the current valuation. It’s an old dilemma. By the time a firm has proved its performance credentials, the market is often well up with events. So is it best to buy shares in firms before they perform well? Maybe, but then we risk underperformance taking share prices lower. I’d handle Kainos today by attempting to buy the stock on dips and down-days, even though the valuation will likely remain full.
