After a difficult period for the business, not helped by uncertainty around government spending, we think software and digital transformation specialist Kainos (KNOS) is on the road to recovery.
What’s more, weakness in the share price over the last 12 months has created an attractive entry opportunity with the rise of artificial intelligence likely to act as an underappreciated driver for the group.
Shore Capital analyst Martin O’Sullivan says: ‘Often overlooked in the hyperbole around AI chatbots and innovation, IT services specialists play a crucial role in turning AI ambitions into reality.
‘These firms provide the essential expertise, infrastructure and project management skills needed to integrate AI solutions seamlessly into existing systems and workflows across diverse industries. They act as the vital bridge between cutting-edge AI technologies and practical, scaleable deployment.’
The Belfast-based business is a FTSE 250 constituent which essentially does three things.
Digital Services helps typically large organisations reshape their processes and operations for a 21st century digital world, and is a key supplier to UK government departments, often writing bespoke tools and software.
As Canaccord Genuity analysts observe, the recent Treasury spending review is a positive development for Kainos and its peers.
‘After a bleak 2024 for most UK government digital transformation/IT services suppliers, the spending review by the UK chancellor creates funding and planning certainty for central government departments as well as the NHS for the next four fiscal years. In addition, it emphasises digital transformation as a key tool to drive government efficiency.’
Then there is Kainos’ Workday (WDAY:NASDAQ) practice. This is delivered in partnership with the $71 billion US enterprise human resources and financial planning software platform, which provides clients with testing, training, installation and audit for the platform, as well as designing new products to enhance the Workday platform.
Analysts estimate the UK’s digital services market will expend to £5.2 billion by 2027, while Kainos’ two Workday divisions are positioned to benefit from the performance of the software giant’s own rapid growth.
Kainos itself observes its enhanced partnership with Workday underpins a £100 million 2026 annual recurring revenue target and its new 2030 target of £200 million.
Kainos cut its global workforce by 7% at the start of the year as it responded to subdued market conditions, which should help support margins.
The shares trade on 17.9 times forecast earnings for the 12 months to 31 March 2026 and, underpinned by strong cash generation, offer a forecast yield of 3.8%. The company also unveiled its latest share buyback programme, worth £30 million, alongside May’s full-year results.
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