Is Kainos Cheap at its Current Valuation?

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Written By Marcus Reynolds

Kainos is a U.K.-based software company listed on the FTSE 250 index. Despite impressive business performance, including a 114% increase in revenue and a 152% rise in basic earnings per share since 2020, the share price has declined by 20% over the same period.

Kainos has continued to demonstrate strong growth, particularly in its Workday-related products, but the company’s heavy reliance on Workday and recent slowdown in revenue growth present notable risks.

While the long-term outlook remains positive, the stock may be overvalued at its current price-to-earnings ratio of 27.

Company Overview

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Kainos provides digital transformation services, including software development, cloud solutions, and IT consulting. The company is particularly known for its expertise in Workday, a leading provider of enterprise cloud applications for finance and human resources.

Kainos has been a Workday partner since 2011 and has leveraged this relationship to drive significant growth. The company operates in three primary segments: Digital Services, Workday Services, and Evolve, a healthcare-focused division.

In 2020, Kainos expanded its portfolio by acquiring several brands from Honeywell, which has since transformed the company into a larger and more diversified entity.

Revenue Growth and Prospects

Kainos has experienced impressive revenue growth over the past decade, driven by strong demand for its digital transformation services. In the past year, however, revenue growth slowed to just 2%, largely due to a decline in the Digital Services segment.

Despite this, Workday-related revenues grew by 28%, and Workday consulting revenues increased by 6%. The company expects growth to rebound this year, particularly in the healthcare sector, where spending is expected to recover.

Looking ahead, Kainos is well-positioned to benefit from the ongoing digital transformation of businesses across various industries. The company’s expertise in Workday and its comprehensive suite of digital services provide a strong competitive advantage.

With a large installed user base and a proven business model, Kainos is poised for continued growth. However, the company’s reliance on Workday and potential spending cuts by clients in the healthcare and financial services sectors present significant risks.

Workday Exposure is a Key Risk

Kainos’ success is heavily tied to its partnership with Workday. While this relationship has been a significant growth driver, it also presents a concentration risk. Any changes in the relationship with Workday or a decline in the popularity of Workday’s products could negatively impact Kainos’ business.

Additionally, the company’s exposure to the healthcare and financial services sectors makes it vulnerable to spending cuts in these industries. Last year, revenues in the Digital Services division declined by 5% due to lower spending by healthcare and commercial clients.

Dividend and Financial Health

Kainos has a solid track record of returning value to shareholders through dividends. The current dividend yield stands at 2.6%, which is relatively attractive for a tech company. The dividend is comfortably covered by earnings and free cash flow, with a coverage ratio of 1.4x.

This suggests that the company has room to continue growing its dividend, provided it can sustain its earnings momentum.

Valuation Concerns

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Despite the company’s strong business performance, the share price has declined by 20% since 2020. At a price-to-earnings (P/E) ratio of 27, Kainos’ shares appear overvalued, especially considering the recent slowdown in revenue growth and potential risks associated with its reliance on Workday.

While the P/E ratio is lower than some peers, such as Sage, which has a P/E ratio in the low forties, it remains higher than what might be considered fair value given the current market conditions and growth prospects.


Kainos is an attractive business with a proven model, consistent profitability, and substantial growth potential. However, the current share price seems overdone, and potential risks, including heavy reliance on Workday and client spending cuts, pose challenges.

While the long-term outlook remains positive, the stock appears overvalued at its current price-to-earnings ratio. Investors should weigh the company’s growth potential against the risks and consider the current valuation before making any investment decisions.


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