UK Markets open in 5 hrs 31 mins

Profits double at this FTSE 250 tech share. I think there could be more to come!

Paul Summers
·4-min read
Business development to success and FTSE 100 250 350 growth concept.
Business development to success and FTSE 100 250 350 growth concept.

Back in August, I wrote about two UK-listed tech shares I’d buy and hold until 2030. One of these was IT consultant and FTSE 250 share Kainos (LSE: KNOS). Since then, the shares have continued to rise. Based on today’s interim results, I think there could be even more to come.

“Very strong performance”

By contrast to so many UK-listed stocks, Kainos said it had “delivered a very strong performance” during the coronavirus pandemic. For a company that specialises in enabling other businesses to ‘digitally transform’, that’s not particularly surprising. However, the numbers are really quite something.

Revenue climbed 23% to £107.2m over the six months to the end of September. Positively, the vast majority of this was organic, highlighting how Kainos isn’t dependent on acquisitions for growth.

Broken down, Digital Services remains the biggest contributor to the top line. Here, revenue rose 16% to £71.4m, helped by the company’s partnership with the UK government in the latter’s digital transformation programme. This has included supporting the NHS as it battles Covid-19.

Elsewhere, revenue from its Workday Practice area jumped 41% to £35.8m as the Belfast-based business continues to support customers such as Warner Music and Blackberry.

All told, pre-tax profits doubled to £24m compared to the same period in 2019!

Now for the bad news…

Is this FTSE 250 stock too expensive?

Shares in Kainos already traded at 41 times forecast earnings before this morning’s report was released. That’s an eye-watering valuation for any company at the best of times. It’s even loftier when markets face the toxic trio of Brexit, lockdowns, and longer-term pandemic-related economic pain.

Notwithstanding, there are a few reasons why I think this company could still make money for me if I were to buy. For one, there’s the near-term outlook. Thanks to a “robust pipeline” and “significant contracted backlog,” Kainos is upbeat on trading over the rest of the current financial year.

Second, the £1.5bn-cap still has lots of room to grow. Indeed, CEO Brendan Mooney believes the coronavirus will “continue to accelerate the already strong demand from customers for digital transformation and Workday services as organisations adapt to the changes that the pandemic has brought.”

The fact that Kainos is recruiting more people is certainly a positive sign. Headcount was up 11% on the previous year, even after a temporary pause following the coronavirus outbreak. What a contrast to other FTSE 250 stocks!

Although most definitely not income-focused, it’s also encouraging to note the rise in dividends paid out to holders.

Today, the FTSE 250 constituent announced a stonking 83% increase to its interim dividend to 6.4p per share. In addition to this, a special dividend of 6.7p per share was also declared. If I owned the stock, I’d take this as a sign of just how bullish Kainos is on its future.

Finally, Kainos has many of the hallmarks of a quality operator — exactly what I look for. As well as being highly-cash generative, the company has £62.5m in net cash. As you might expect from a business providing software solutions, operating margins and returns on capital employed (ROCE) are also consistently high.

Bottom line

With its vertigo-inducing price tag, Kainos will be anathema to value investors. Given the choice over buying a beaten-up, debt-laden straggler and a solid growth share that can be held for years, I know which would get my vote.

The post Profits double at this FTSE 250 tech share. I think there could be more to come! appeared first on The Motley Fool UK.

More reading

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Kainos. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020