Full year results from the digital transition and migration business are very decent if you’re willing to overlook Kainos’ (KNOS) Evolve EMR NHS platform. It is designed to streamline NHS services and drag them into the 21st Century, making access and information easier for patients while lowering costs for the UK’s health service.

The problem is that investors are clearly not willing to ignore the problem; Evolve revenues declined 12% to £10m in the year to 31 March 2017. Kainos remains positive in the medium-term but its comments that opportunities for the platform in the next 12 months are ‘muted’ is a short-term concern. Sales orders are down 52% to £4.8m while the contacted backlog of implementations is also down sharply on this time last year, £16m versus £24.8m.

Hence today’s ugly 5.5% fall in the share price to 226.75p.

ROCK AND A HARD PLACE

Kainos faces a conundrum with Evolve EMR. On the one hand political leaders are all talking about better and bigger funding for the NHS, yet for now at least, the cash taps remain largely off. This will presumably improve after 8 June once a new government is in place – both the Conservatives and Labour are promising varying degrees of fresh healthcare funding.

But let’s put Evolve EMR into perspective. The platform generated £10m of the company’s £83.5m of total revenue. Central government digitisation work continues apace away from the NHS, as does enterprise business through its Workday enterprise resource planning and human resources tools. Overall revenue rose 9% last year.

More work than ever is being contract on a repeating software-as-a-service (SaaS) model than ever before which also bodes well for predictability and earnings quality. Cash conversion was typically strong at £16.6m, partly because of SaaS orders fast cash collection.

There’s also a small US healthcare operation gaining traction, Evolve IC. It’s still very small with sales of £3m but Kainos has developed some encouraging third party relationships to help it grow quickly.

PLENTY OF OPTIMISM

Kainos has bolstered its workforce in both its Belfast and Gdansk development hubs mostly to drive its best growth opportunities this year, including Workday accredited consultants from 75 to 110. The over headcount has gone from 830 to 975. Now the company needs clearer direction from a new government on NHS investment, and the hard cash that counts.

Analysts at Canaccord Genuity actually raised forecasts for this year following today's figures. They are now predicting £14.8m pre-tax profit this year on £89.1m of revenue. The broker has also lifted its share price target from 255p to 290p.

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

Issue Date: 30 May 2017