Belfast-based digital services business Kainos (KNOS) has high-quality metrics in spades, and Shares believes the stock offers long-term upside. In its most recent financial year (to March 2023), the company demonstrated return on capital employed, operating margins and return on equity of more than 40%, 14% and 35%, according to data from Stockopedia.

Yet the shares are trading on a March 2024 price to earnings multiple of about 24, and an EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) of barely 16, ‘close to five-year lows,’ according to Shore Capital analysts, after near-22% decline for the shares since June.

Kainos is a FTSE 250 IT business that does three things. First, it helps (typically large) organisations transition their processes and operations into the 21st Century digital world. Kainos is one of the key IT expertise suppliers to UK government departments, often writing bespoke tools and software services for the Cabinet Office, Home Office, Driver & Vehicle Licencing Agency, Department for Transport, Land Registry and others.

Second, the company is one of 40-odd global accredited installation providers for Workday, the $56 billion US human resources and financial planning software platform. Kainos provides implementation and testing for users of Workday enterprise management tools. Last, there is Evolve, a healthcare and life sciences arm that provides  the NHS with things like electronic medical records that help streamline the service the NHS can deliver to patients.

The sharp share price drop since the summer is largely down to investors unnerved by June’s announcement that chief executive Brendan Mooney would be standing down after 22 years in the top job, and 34 with Kainos. His replacement Russell Sloan, an internal appointment, can’t match that stretch – he’s only been with Kainos 24 years.

This is a measure of how well Kainos is run, and that its top talent doesn’t feel the need to move elsewhere for exciting career progression. That’s hugely encouraging for investors in an environment where tech talent is in short supply.

Sloan will stamp his own personality on Kainos in time but, crucially, he admits little need to change the pattern of the company’s knitting - why alter what’s worked so well for years.

Kainos is a Belfast University spin-out which listed on the London stock market in 2015. Since then, revenues have gone from about £60 million to this year’s estimated £424 million (£479 million is forecast for fiscal 2025). Since 2018, 35% has provided a floor for both return on capital employed and return on equity, while operating margins have averaged 15%.

There are significant opportunities ahead thanks to its ability to internalise and monetise new generative AI capabilities, such as building Microsoft Co-Pilot into its tools, and large contracts continuing to flow from central government.

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