Kainos rallies on Berenberg upgrade to 'buy'

Kainos shares rallied on Friday as Berenberg upgraded its stance on the software company to ‘buy’ from ‘hold’ and hiked the price target to 1,480p from 915p, noting the half-year trading update pointed to "extraordinary strength" across the business.

Berenberg said it had recognised the attractive qualities of the business but its premium rating had led the bank to stay on the sidelines. However, it ultimately underestimated the strength of the earnings drivers.

The bank said investors may question the merits of buying a stock following such a significant period of outperformance.

"However, we highlight that the robust public-sector performance, accelerating trends for the Workday Practice business and flexibility on margins mean that Kainos could offer as much as 20% upside to earnings estimates next year.

"Such is the strength of the underlying fundamentals at Kainos that the possible earnings upside could continue to justify a significant premium to peers."

It said Kainos continues to benefit from robust public sector growth, driven by the UK government’s investment in digital transformation activities. It noted the company’s performance has accelerated in recent months and said it now expects its public sector revenues to grow by 18% in FY21.

"An increasing opportunity to participate in Covid-19-related projects, greater exposure to the government’s cloud spending and ongoing potential to gain market share lead us to believe that Kainos can continue its strong performance into FY22."

At 0925 BST, the shares were up 5.2% at 1,370p.