EMIS saw revenues rise 1% in the first half of the year to £79.2m, with underlying operating profits of £17.5m down 1%. The interim dividend increases 10% to 12.9p per share.
The shares fell 2.2% following the announcement.
EMIS has a strong market share in its main businesses, providing software to GPs and pharmacies to manage their practices and patient record keeping. With almost 75% of the group's English GP practices having used EMIS Health for more than a decade, it has a loyal client base which generates strong recurring revenues.
The group's dominant market position means it's well positioned to deliver the IT systems needed to help the NHS provide a better quality of care more efficiently. The problem is that execution has not been as smooth as one might have hoped.
While it would be unfair to blame the group for the headwinds brought on by the NHS's spending squeeze, we've also seen delays in the roll out of services in Northern Ireland, while the Specialist & Care division, which includes the business acquired in 2013's £57.5m deal for Ascribe, has encountered problems with its contracts.
One saving grace has been its strong balance sheet and healthy cash generation. Over the last ten years, EMIS has spent a shade over £60m on capital expenditure, but generated well over double that in free cash. So while execution has been far from perfect, the group has been able to quickly repay the debt it took on to fund its acquisitions while still increasing the dividend.
The appointment of a new CEO seems to have marked something of a rethink. The foray into clinical services has taken a back seat, with the focus returning to software provision. However, with the NHS unlikely to allow any one provider to gain full control of its systems, further meaningful market share gains in Primary Care are unlikely. That might explain the plan to grow Patient.info as an e-commerce platform servicing patients directly - something we'll be watching with interest.
At present, the shares offer a prospective yield of 2.6% in 2018 and trade on a forward price to earnings ratio of 20.2 times, above their long run average of 19.4.
First Half Results
The group has carried out an extensive reorganisation under new CEO Andy Thorburn. Costs associated with this restructuring reached £2.5m, but are expected to deliver improvements from the second half of the year including £4.5m in annual cost savings from 2018. Recurring revenues now account for 84% of the group total, while market share remains broadly flat across key divisions.
The core Primary, Community & Acute Care business accounted for 74% of group revenues and 87% of operating profit in the first half. That includes a 3% fall in revenues, but operating profit increase of 5% as a result of tight cost control. Market share improved slightly to 56% (31 December: 55%), with the roll out of EMIS Web in Northern Ireland continuing as planned.
Community Pharmacy (13.7% of group revenues, 19.6% of profit) saw market share hold steady in the half at 37%. However, revenue moved up 5% and, with operating profits up 16%, as the ProScript Connect dispensary management product roll out gathered pace.
The smaller Specialist & Care and Patient businesses (10.6% and 1.8% of revenues respectively) both reported operating losses, of £385,000 and £327,000.
Specialist & Care implemented five new diabetic eye screening contracts during the half, and gave notice on one unprofitable contract. Investment in Patient's publishing/media and e-commerce platform continues, but is coming in cheaper than previously expected.
At the end of the half EMIS had £10.5m of net cash on the balance sheet (2016: £0.7m).
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.