Digital transition company Kainos (KNOS) has started 2021 where it left off last year; beating expectations and lighting a fire under the share price.

Kainos was one of Shares top picks for 2020 at 718p (19 December 2019), and ended 2020 up 70% at £12.18p.

‘Continued momentum in our business has driven a strong trading performance and we therefore expect results for the year ending 31 March 2021 to be ahead of current market consensus expectations’, said the FTSE 250 company on Friday.

‘BEAT, RINSE, REPEAT’

It’s worth bolding the most relevant bit since statements of this type have become increasingly frequent from Belfast-based Kainos, most recently in October. As Canaccord Genuity analysts Kai Korschelt and Steve Robertson headlined their note to clients today, ‘beat, rinse, repeat.’

Kainos stock rallied nearly 20% on the news to £13.50, just a fraction off its £13.68 all-time record hit in October.

‘Full year 2021 is turning out to be a record year for Kainos, not just in terms of revenues and earnings, but also expectation beats and raises’, the analysts said.

Performance has been driven by both the Digital Services and Workday practice, with the former benefiting from substantial, long term engagements within the UK government’s digital transformation programme, as well as the NHS’s response to Covid-19.

‘The NHS continues to be the catapult for Digital Services sales, which we now expect to grow 40% year-on-year in the second half and 28% in the full year’, said the Canaccord number crunchers. The fiscal year runs to 31 March.

‘We believe demand for Covid-19-related digitalisation initiatives have continued to exceed expectations. Kainos is also beginning to see a rebound from enterprise customers, while Workday Services and Kainos’ testing SaaS platform’, or software-as-a-service.

BIG UPGRADES AGAIN

The upgrades pushed through by Canaccord’s Korschelt and Robertson are focused on Digital Services where full year 2021 revenue growth expectations are now pitched at 28%, versus an already impressive 13% previously.

Overall, new estimates imply that Kainos will grow revenues by about 30%, with an assumed profit drop-through rate of around 50%. This is balanced by the increasingly necessary use of third-party contractors to satisfy demand which we expect to keep a lid on gross margin expansion in the second half.

First half gross margin was around 52%, up from a little under 47% for the last full year.

‘Whilst the short-term outlook is somewhat caveated by the development of Covid-19 and possible budgetary restraints in the coming months, the underlying fundamentals driving digital transformation remain, and so we remain very positive on the longer-term prospects for Kainos’, said Megabuyte analyst James Preece.

READ MORE ABOUT KAINOS HERE

Find out how to deal online from £1.50 in a SIPP, ISA or Dealing account.

Issue Date: 22 Jan 2021