Panmure Liberum has upgraded Kainos to buy from hold, betting that the IT services group is about to convert strong sales growth into rising profits.
Kainos provides IT services to government and runs a fast-growing business selling software products built around Workday, the enterprise applications vendor.
The broker has raised its profit forecasts for the company for the first time, having lifted revenue estimates four times since last September.
It nudged up pre-tax profit and earnings estimates for the 2027 and 2028 financial years by 3% to 5%, citing a run of public sector contract wins.
Analyst Andrew Ripper set a price target of 1040p, around 30% above the recent share price of 779p.
The shares have fallen more than 20% so far this year, weighed down by fears that artificial intelligence could disrupt software valuations.
Panmure Liberum argued that the sell-off looked overdone given a clear improvement in the underlying business, with bookings up 32% in the year to March.
It expects all three of Kainos's divisions to deliver double-digit organic sales growth in the current financial year.
The broker said the source of investor frustration had been a failure to turn rising revenue into profit, with operating margin sliding from 19% to 14.8% over two years.
That squeeze reflected higher national insurance costs, the return of staff bonuses, and the cost of a distribution deal with Workday.
Panmure Liberum expects those drags to fall away from the 2027 financial year, allowing more revenue to reach the bottom line.
The biggest near-term driver is Kainos's public sector arm, a top 10 supplier to UK government that is benefiting from a push to digitise services, particularly in health.
The company is also targeting £200 million of recurring revenue from its Workday software products by 2030, a compound annual growth rate of 19%.
Panmure Liberum flagged longer-term risks, chiefly that Workday could claw back value from its partners or that AI lets large clients build their own tools.
Even so, it noted that Kainos trades below rivals Softcat and Computacenter despite faster expected growth.
The 1040p target is based on a discounted cash flow model using a 9% discount rate.
