Berenberg downgrades Kainos to 'hold', slashes target price

Analysts at Berenberg downgraded software outfit Kainos from 'buy' to 'hold' on Monday, stating the firm was now "stuck in an awkward spot".

Berenberg stated the decision to downgrade Kainos was "a difficult one" and noted that it might seem "odd" given its bullish position regarding the IT services landscape and the fact that it even thinks scope remains for the firm to outperform consensus topline forecasts.

However, the German bank said the challenge was cost inflation, which it thinks has accelerated since the first half of Kainos' trading year and with little ability to renegotiate pricing on contracts already underway, it thinks there is "a strong likelihood" that the company will rebase short-term margin guidance at a lower level.

"While this may be offset by faster growth, it might not," said the analysts.

Berenberg, which also slashed its target price on the stock from 2,100.0p to 1,200.0p, added that while it had opted to leave its estimates unchanged, the risk has now "definitely risen".

"With the shares still trading on a premium valuation too, we think the risk/reward is now more balanced," concluded Berenberg.

Reporting by Iain Gilbert at Sharecast.com