Kainos (KNOS)  967.5p

Loss to date: 4.8%

Talking down growth is never a good sign and Kainos (KNOS) shares show the scars of that mood change. When we flagged the company in May (16 May) it was on the premise that slowing digital workloads bolstered by AI (artificial intelligence) scope to take out costs and provide growth for corporate clients was a theme ready to turn, but that improvement has thus far failed to emerge.  

The net result is that the Belfast-based software supplier is now steering investors towards lower growth than hoped for, and crucially, below market consensus, which had been pitched at £416 million revenue for the year to 31 May 2024.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

It is sometimes said that timing is everything but getting it right remains very tricky.

Within days of our article, the stock had rallied 25% but those gains have drifted into the ether as the invisible hand of the market steered a different course.

Yet Kainos remains one of those rarities, a UK-listed tech business capable of withstanding the slings and arrows of outrageous fortune and we fully anticipate management to be front footed when it comes to addressing its issues, be that seeking out new areas of growth, reeling back on running costs, or most likely some combination of the two.

WHAT SHOULD INVESTORS DO NOW?

It is worth bearing in mind that lowering forecasts is not something Kainos does lightly or frequently but against a backcloth of ongoing softness in the commercial sector, or delays in public sector projects, many impacted by the general election, its impressive built from the ground up Workday (WDAY:NADAQ) practice is untypically struggling.

The US enterprise software giant is experiencing slowing growth itself, albeit still 17%-odd in its second quarter report, and perhaps as Kainos continues to consolidate its positioning as a global Workday partner, we should expect its growth profile to converge.

With robust and firm operating margins (16%) and outstanding return on capital (36.7%), we still see Kainos as a great company own for investors playing a long game, especially on a price to earnings ratio below 20.

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