Kainos Group: Small Cap, Big Potential

Kainos Group is a UK-based digital services and software company that helps public institutions and commercial clients modernise their operations through technology. Known for its close partnership with Workday and deep experience in government digital transformation, Kainos delivers both consulting services and high-margin proprietary software products. From automating NHS workflows to building cloud-based tools for global enterprises, the company combines recurring revenue, strong customer retention, and a long track record of profitability. The question is: Does this quiet tech leader deserve a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

For full disclosure, I should mention that I do own shares in Kainos Group at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Kainos Group, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Kainos Group is a UK-based technology company that provides IT consulting, digital transformation, and software development services. Founded in Belfast in 1986 as a spin-out from Queen’s University Belfast and Fujitsu, the company works with public sector bodies, healthcare providers, and commercial clients. Its mission is to help large organizations modernize outdated systems, move to the cloud, and deliver faster, more efficient services to their users. The business is divided into three main segments. The Digital Services division focuses on building secure and user-friendly digital platforms, often for essential public infrastructure such as passport applications, tax services, and patient management systems. These projects are typically large, long-term, and mission-critical. Workday Services is where Kainos acts as a trusted partner for Workday, helping organizations deploy and expand their use of Workday’s HR, finance, and planning software. With over a decade of experience and certified teams in more than 20 countries, Kainos is one of Workday’s most experienced and respected global partners. The third segment, Workday Products, includes a suite of proprietary tools such as Smart Test, Smart Audit, and Smart Shield, which enhance the Workday platform and are sold on a recurring subscription basis to over 550 customers. Kainos has built a strong competitive moat through its deep integration with Workday, proprietary software products, trusted position in the public sector, and long-term customer relationships. Its long-standing and deep relationship with Workday is one of the most important. As Workday’s largest European partner and one of the few globally recognized in all partnership categories, Kainos has privileged access to new opportunities and features. Its proprietary products further strengthen its position by generating recurring revenue and creating customer lock-in. In the public sector, Kainos benefits from its presence on major procurement frameworks and a reputation for delivering complex national projects, such as those for the NHS and HMRC. These contracts are typically difficult to win and highly sticky, creating high barriers to entry. Another strength is Kainos’s ability to retain clients over many years. More than 80 percent of its annual revenue comes from existing customers, and multi-phase projects often expand in scope over time. The company’s high Net Promoter Score reflects strong client satisfaction, while its low employee attrition supports consistent quality and delivery. Finally, its partnerships with cloud giants like Microsoft and AWS give Kainos a seat at the table in major digital transformation initiatives, further reinforcing its credibility and reach.

Management

Dr Brendan Mooney serves as the CEO of Kainos Group, having returned to the role in December 2024 following the resignation of his successor Russell Sloan. Brendan Mooney originally joined Kainos in 1989 and led the company as CEO from 2001 to 2023, overseeing a transformative period in which Kainos evolved from a regional IT services firm into a publicly listed international digital services and software provider. During his initial 22-year tenure as CEO, he steered Kainos through its 2015 initial public offering on the London Stock Exchange and laid the foundation for its expansion into Workday services and proprietary software products. Although Brendan Mooney stepped down from the CEO role in 2023, he continued to serve as an advisor to the company. His return in late 2024, just over a year later, came at a time when Kainos had experienced a decline in investor confidence and revenue performance. His reappointment was widely seen as a move to restore strategic continuity and reaffirm Kainos’s long-term growth ambitions. Brendan Mooney has expressed renewed enthusiasm for the company’s future, stating that his time away provided a fresh perspective and reinforced his belief in Kainos’s potential. Brendan Mooney’s leadership is credited with building many of the enduring strengths that define Kainos today. These include its trusted position in the UK public sector, its long-standing partnership with Workday, and its development of proprietary Workday-related software tools. Under his guidance, Kainos also established a strong culture focused on delivery excellence, talent development, and customer satisfaction. His leadership style is widely described as strategic and steady, with a focus on building for the long term rather than managing for short-term outcomes. As CEO, Brendan Mooney is expected to lead Kainos through its next chapter of growth by deepening its capabilities in digital transformation, expanding its Workday services globally, and continuing to invest in high-margin software products. His return has been welcomed by the board, employees, and shareholders, all of whom view his experience and continuity of vision as vital to navigating a more complex and competitive operating environment.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year.  Kainos Group has consistently achieved a high ROIC above 30% in nine of the past ten years. Kainos has delivered strong returns because of the way its business is built. Unlike companies that need to spend heavily on buildings, equipment, or inventory, Kainos provides digital services and software, so it doesn't need much physical investment to grow. Its main strengths are its people and the software tools it creates, which keep overall investment low. One of its most profitable areas is its Workday Products division, which generates steady income from tools like Smart Test and Smart Audit. These tools require effort to build at first, but once developed, they can be sold repeatedly with very little added cost. Another reason for Kainos’s strong returns is that most of its customers keep coming back. In fact, more than 80% of its revenue comes from existing clients, many of whom continue to expand how they use Kainos’s services and products. This steady business helps the company grow without having to constantly chase new customers or spend heavily to win new contracts. Kainos also runs the business in a way that keeps things simple financially. It gets paid regularly for its work and doesn’t need to hold large amounts of stock or wait long to be paid by customers. On top of that, the company has little or no debt and holds a healthy cash balance, so it doesn’t have to spend money on interest payments. Together, these factors mean Kainos can generate strong profits compared to the money it puts into the business, which is why its ROIC has stayed high year after year. The drop in Kainos’s ROIC to 25,8% in fiscal year 2025 was mainly due to a decline in profitability while investment levels stayed largely the same. Revenue and earnings fell as demand from commercial clients softened, public sector projects were delayed, and broader economic uncertainty weighed on growth. At the same time, Kainos continued to invest in areas like AI, product development, and global expansion, so costs remained high even as revenue declined. Since the amount of money tied up in the business stayed steady, the combination of lower profits and unchanged investment led to a lower ROIC for the year. This drop appears to be more cyclical than structural and should not be a concern in the long term.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Kainos increased its equity every year from fiscal year 2016 to fiscal year 2024 because it consistently ran a profitable business and didn’t need to spend much to grow. While there was some share dilution in certain years, mostly from giving shares to employees as part of their pay packages, the overall effect was small and didn’t stop equity from rising steadily. The company didn’t rely on borrowing money or raising lots of capital, which also helped keep things simple and focused on organic growth. In fiscal year 2025, equity declined for the first time in nearly a decade. This was mainly because profits fell, due to weaker demand from commercial clients, delays in public sector projects, and continued investment in new areas like AI and product development. Even though Kainos was still profitable, the earnings were lower. However, equity remained at its second highest level ever, which shows the business is still in a strong financial position. Unless this becomes a long-term trend or is followed by bigger financial problems, the small decline doesn’t seem like something to worry about. It looks more like a temporary dip during a slower year rather than a sign of deeper issues.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Kainos has seen strong free cash flow generation over the past five years, with some natural year-to-year fluctuations. Free cash flow increased significantly in fiscal year 2021, dropped in fiscal year 2022 to its lowest level during that period, and then rebounded sharply in fiscal year 2023. It continued to grow in fiscal year 2024 before declining again in fiscal year 2025. Despite the recent dip, free cash flow in 2025 remained broadly in line with the levels seen in 2021 and 2023, which were both strong years for the business. The drop in fiscal year 2025 was mainly the result of lower profits, as commercial demand softened, public sector project starts were delayed, and the company maintained its investments in areas like AI, product development, and international expansion. These strategic initiatives, while aimed at future growth, temporarily reduced the amount of cash left over after operating expenses. Looking ahead, there is reason to expect free cash flow margins to improve over time. Kainos benefits from high customer retention, recurring software revenue, and a business model that does not require heavy capital spending. As macro conditions stabilize and recent investments begin to pay off, the company should be well positioned to convert a greater share of its earnings into cash. Fiscal year 2025 looks more like a pause than a reversal in what has been a solid long-term cash generation story. Investors can expect Kainos Group to continue using its free cash flow in a balanced and disciplined way. The company prioritises reinvesting in long-term growth while also rewarding shareholders. It follows a progressive dividend policy, increasing the dividend in line with earnings, and in fiscal year 2025 distributed 73% of adjusted profit after tax as dividends. In addition to regular payouts, Kainos has returned surplus cash to shareholders through share buybacks. Free cash flow yield is at its highest level ever, which suggests that the shares are trading at a more favourable price than usual. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to consider is debt. It is crucial to evaluate whether a business has a manageable debt level that can be repaid within three years, which is typically assessed by dividing total long-term debt by earnings. An analysis of Kainos’ financials shows that the company has no long-term debt. In fact, Kainos has remained debt-free for the past decade. Management has consistently emphasised that maintaining a strong balance sheet is a core principle of the business. Given this track record and their clear messaging, I do not expect debt to become a concern for Kainos in the future.

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Risks

Macroeconomic conditions is a risk for Kainos Group. In fiscal year 2025, the company felt the impact of a weaker economic environment, with commercial sector revenue falling by 32% and public sector revenue declining by 9%. This was seen across several areas of the business. In the commercial sector, many clients delayed or reduced spending on digital transformation projects due to wider economic uncertainty. Most of these clients operate globally and were affected by slower growth, inflation, and shifting trade policies such as US tariffs. This cautious approach led to fewer and smaller contracts in Kainos’s Workday Services division. On the public sector side, revenue was affected by the UK General Election in July 2024, which caused delays in decision-making as the new government took time to outline its long-term priorities. The slowdown was especially visible in the Digital Services division, where both commercial and public projects were postponed or scaled back. Kainos has also noted that this uncertainty could continue throughout 2025, with ongoing volatility in global trade and rising geopolitical risks adding further pressure. The company highlights that events such as a recession, financial market disruption, or the closure or restructuring of major public bodies like NHS England could negatively affect revenue, profit, and cash flow. While Kainos remains financially strong, its exposure to large clients and long-term transformation projects makes it sensitive to changes in the wider economy.

Competition is a risk for Kainos Group, particularly in its Workday Services division, where the landscape has changed noticeably over the past year. Although the company continues to report strong customer satisfaction and a high win rate, it faced a 12% revenue decline in Workday Services during fiscal year 2025. This was partly due to a weaker economic environment, but also because of rising competition. The number of accredited Workday partners more than doubled during the year, increasing from around 60 to over 100. Many of these new entrants are aggressively pricing their services to win business and build a presence in the market. Since these newer partners often lack an established track record, they rely more heavily on offering lower prices to secure contracts. This shift has led to greater pricing pressure for Kainos and made it harder to win larger, high-value deals at the same margins as before. In addition, much of Workday’s recent growth has come from existing customers who are adding new modules, which typically require less consulting support. This has further reduced the size and scope of available projects in the Workday ecosystem. Some new partners also specialise in certain verticals, such as professional services, which introduces a more targeted form of competition in sectors where Kainos has historically been strong. While the competitive environment had been relatively stable for many years, the rapid increase in partners and pricing pressure poses a real challenge. If this trend continues, it could limit revenue growth, reduce margins, and make it harder for Kainos to differentiate based solely on experience and quality.

Laws and regulations is a risk for Kainos Group, especially as the regulatory landscape continues to expand and evolve across the markets where the company operates. Kainos provides digital services and software to public and commercial clients in highly regulated sectors, and is therefore required to comply with a wide range of legal, contractual, and industry-specific standards. One key area is data privacy and information security. In Europe, for example, the General Data Protection Regulation (GDPR) imposes strict rules around the handling of personal data. Similar laws exist in other regions, and as Kainos expands internationally, it must constantly stay up to date with new and changing requirements. Non-compliance could lead to financial penalties, reduce short-term profitability and cash flow, and damage customer trust. In fiscal year 2025, the company noted a substantial increase in applicable regulations, including the EU AI Act, the EU Network and Information Systems Directive 2 (NIS2), and the Digital Operational Resilience Act (DORA). These new rules introduce further complexity in areas such as artificial intelligence, cybersecurity, and IT system resilience. While Kainos is not always directly regulated under these laws, many of its customers are, and expect their service providers to meet the same standards. This means Kainos must not only maintain its own compliance but also design its products and services in a way that helps customers meet their regulatory obligations. Falling short could risk customer relationships, delay project delivery, or make it harder to win new contracts, particularly in the public sector or industries with strict compliance expectations. As regulations continue to multiply and tighten, the cost and complexity of compliance will likely grow, making it an important operational and reputational risk for Kainos.

Reasons to invest

Kainos’ Workday Products segment is a reason to invest in Kainos. This part of the business has grown rapidly in recent years and now accounts for 19% of total revenue, up from 15% the year before. It includes a suite of proprietary software tools that complement Workday’s core HR and finance systems. These products, such as Smart Test, Smart Audit, Smart Shield, and Employee Document Management, are delivered on a subscription basis, creating recurring, high-margin revenue streams. In fiscal year 2025, revenue from Workday Products rose 24% to £71,3 million, with annual recurring revenue reaching £72,6 million. More than 550 customers, including major global organisations like AT&T, Booking.com, and Netflix, now use at least one of these tools. Kainos is the only Workday partner globally to be recognised in all three categories: Services, Software, and Extend. In July 2024, it deepened this relationship by launching a new strategic agreement that incentivises Workday’s global sales teams to promote and co-sell Kainos-developed products through the Workday Marketplace. This gives Kainos direct access to Workday’s growing customer base of over 11.000 organisations. The company is also continuing to invest in expanding its product portfolio, with a fifth tool set to launch in late 2025 to support customers with pay transparency and compliance with the upcoming EU Pay Directive. These tools address specific gaps in Workday’s platform and are designed to reduce costs, improve compliance, and simplify complex processes. Kainos believes this segment could generate £100 million in annual recurring revenue by 2026 and £200 million by 2030. As adoption grows and new products are introduced, the Workday Products segment is expected to become an increasingly important and profitable part of the business, offering long-term growth potential that is not heavily reliant on large consulting projects or headcount expansion.

Digital transformation is a reason to invest in Kainos Group. The company is well-positioned to benefit from the growing demand across public, healthcare, and commercial sectors for modern technology solutions that improve service quality while reducing costs. In the public sector, the UK Government has made digital transformation a central part of its reform agenda. The State of Digital Government Review, published in early 2025, showed just how much work remains to be done: nearly half of central government and NHS services still lack a digital pathway, many processes remain highly manual, and legacy systems continue to create cybersecurity risks and inefficiencies. The report estimated that full digitisation could save the government over £45 billion per year. The review also highlighted that UK businesses spend more than three times as much on technology as the public sector, underlining just how far government services have fallen behind. This gap reinforces the scale of the opportunity in public sector digitisation, an area where Kainos already has a strong presence and deep experience. The government reinforced this direction with the publication of the Comprehensive Spending Review in June 2025, which outlined departmental budgets through 2028 and included clear commitments to invest in technology, digital services, and artificial intelligence. In healthcare, Kainos works closely with the NHS, where modernisation is essential for delivering better outcomes. Although some short-term disruption is expected following the announcement to restructure NHS England, the long-term need for digital upgrades remains intact. In the commercial sector, businesses face similar pressures to reduce costs, improve productivity, and deliver better experiences for their customers and employees. Kainos’s approach of building strong relationships through early delivery on smaller projects allows it to expand its role over time as client needs grow. As more organisations embrace cloud computing, automation, and artificial intelligence, Kainos’s experience in delivering secure, user-focused digital platforms puts it in a strong position to benefit from this long-term structural shift.

Smaller but faster-growing areas are a reason to invest in Kainos Group. The company is actively expanding into promising new technologies like artificial intelligence, data analytics, and low-code software development. These areas may be smaller today but are growing quickly and could become major sources of revenue in the future. Kainos has already delivered more than 250 AI and data projects, including 88 in the last year alone, and now has over 250 specialists working in this space. In the UK public sector, it is one of the top five suppliers of AI services, with over £61 million in contracts so far. Kainos is also investing in new ideas through an internal innovation program, supporting staff-led projects and experimenting with how new technology can be used to help customers. It has formed strong partnerships with major tech companies like Microsoft and Amazon Web Services, which help it stay at the forefront of the latest developments. For example, it has launched a Microsoft AI Centre of Excellence and is developing tools that are already being used in areas like fraud detection, compliance monitoring, and document automation. Kainos is also exploring next-generation technologies such as Agentic AI, green computing, and even quantum computing. All of these efforts show that the company is not only keeping up with the pace of innovation but is actively trying to lead in these fast-changing areas. That gives investors a chance to benefit from long-term growth as these technologies become more widely used.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 0,28, which is from the fiscal year 2025. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 14,7% over the next five years. Additionally, I have selected a projected future P/E ratio of 30, which is double the growth rate. This decision is based on Kainos' historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be £8,40. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Kainos at a price of £4,20(or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 59, and capital expenditures were 3. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 2 in our calculations. The tax provision was 13. We have 123,6 outstanding shares. Hence, the calculation will be as follows: (59 – 2 + 13) / 123,6 x 10 = £5,66 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Kainos' Free Cash Flow Per Share at £0,45 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is £7,10.

Conclusion

I believe Kainos is an intriguing company with strong management. It has built a moat through its deep integration with Workday, proprietary software products, trusted position in the public sector, and long-term customer relationships. The company has consistently achieved a high return on invested capital since its IPO, and free cash flow has grown significantly over the past five years despite a small drop in fiscal year 2025. Macroeconomic conditions are a risk because uncertainty can lead both commercial and public sector clients to delay or reduce spending on digital transformation, as seen in fiscal year 2025 when slower global growth, inflation, and the UK General Election led to fewer contracts and project delays. Competition is also a growing risk, especially in the Workday Services division, where the number of certified partners more than doubled in a year, leading to aggressive pricing and pressure on margins. Regulatory risk is rising too, as Kainos operates in highly regulated sectors and must comply with evolving standards in areas like data privacy, cybersecurity, and AI. Non-compliance could result in financial penalties, loss of trust, and fewer contract wins, especially with new rules like the EU AI Act and NIS2. Kainos’s Workday Products segment is a reason to invest because it generates high-margin, recurring revenue from proprietary software tools that enhance the Workday platform. With rapid growth, an expanded strategic partnership with Workday, and adoption by over 550 global customers, this segment offers scalable long-term potential with less reliance on consulting headcount. Digital transformation is another reason to invest, as governments, healthcare systems, and businesses increasingly adopt modern technology to cut costs and improve services. With strong public sector expertise and capabilities in cloud, automation, and AI, Kainos is well-positioned to benefit from this shift. The company is also developing expertise in smaller but faster-growing areas like AI, data analytics, and low-code development, which could become meaningful revenue streams over time. These newer areas are supported by strong partnerships and an internal innovation program. Overall, I believe Kainos is a great company that had a challenging fiscal year 2025, but the issues appear cyclical rather than structural. Buying shares below the Payback Time price of $7,10 could be a good long-term investment.

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