New Holdings - EMIS & Next

Steve Clayton - Fund Manager

10 June 2020

We’ve added a couple of new, very different names to the fund. One is a healthcare software company, the other is Next, the increasingly Online retailer.

EMIS

We have taken a position in EMIS Group within the HL Select UK Income Shares fund. In these uncertain times, recurring revenues are exceptionally attractive, and EMIS has these in abundance.

The company is a software business, specialising in healthcare. GP surgeries and pharmacies use EMIS software to run their administration, from patient records to details of prescriptions dispensed, hours worked by practice members and surgery appointment schedules. The group also has some products that address specialist functions within hospitals and community health services, but the bulk of the business comes from the GP and Pharmacy sectors.

The tasks that EMIS’s software performs are essential, everyday functions within their customers businesses. They are deeply embedded into the workflows of the practices and pharmacies and switching away to another provider would be expensive, disruptive and require staff training and potentially raise risks of mistakes during a handover period. For these reasons, once customers sign up for EMIS products they tend to stay on board for long periods of time.

The majority of revenues not only recur, but they are also often paid for by public sector organisations making them exceptionally secure. As a software business, EMIS tends to be strongly cash generative and this has allowed it to continue paying dividends throughout the Covid-19 outbreak.

Strength in Numbers

Not only does EMIS have secure, recurring revenues, it also boasts impressive market shares. In the Primary division, which houses the GP practice management software, EMIS serves 57% of English GP surgeries, almost double the share of the next largest operator, TPP. In the Community Pharmacy market, EMIS software is also the market leader, with 36% of pharmacies using EMIS products, just ahead of Cegedim of France. These two segments account for 70% of the group’s revenues.

The smaller divisions of Community Care and Acute provide services such as allowing healthcare workers to access patient records remotely and update them as they treat the patients in the community. A&E medics can use EMIS software to drag a patient’s GP records across, helping to improve treatment outcomes. Other products address specialist niches within hospitals.

Core products are sold on subscription, with annual inflationary pricing increases. The group also earn revenues from allowing other software providers to link into the EMIS network, offering service enhancements to clients, with EMIS earning a slice of the extra revenues generated.

A New Ecosystem for Healthcare

EMIS are developing their latest generation of the core primary health platform, to be called EMIS-X. Their vision is that this will sit at the heart of the primary care sector. EMIS-X will be the conduit that allows healthcare professionals to access the information they need, schedule their workflows and manage their resources to enable workflows to run seamlessly across the primary care sector. EMIS-X will link GP’s, the community and pharmacy sectors and A&E departments and social care homes.

EMIS will migrate all of their products onto this platform and it will run on within the cloud, hosted by Amazon’s AWS division. Running in the cloud will make the platform faster, easier to update and more secure than if it sat in customers’ own premises, dependent on their own network security.

The group hope to achieve mid to high single-digit organic revenue growth. Bolt-on acquisitions will be used to raise growth in private sector-facing parts of the group. Investment levels will be rising over the next few years to fund these developments, but EMIS starts from a position of having net cash in the bank. Profit margins are almost 25%, reflecting the strength of the group’s market position. Almost 80% of group revenues are recurring, which puts the group in a very sound position to grow from.

Risks include a failure to execute the migration to the new EMIS-X platform on time and on budget. Healthcare data is both sensitive and critical to care. Failure to record data accurately or to move it securely around the network could have negative consequences. The group has previously had to incur meaningful costs to correct an identified deficiency in this area.

On balance though, we think the combination of EMIS’s market position, its financial strength and recurring revenues add up to an attractive proposition. We don’t expect EMIS to be the fastest-growing software business out there, but we think it stacks up well as a dependable proposition in an uncertain world.

Next plc

Next, the clothing-retailer, is a business that has been taken to the cleaners during this crisis, with the share price more than halving peak to trough. We established a position between 24 April and 4 May, paying an average price of £46.30.

Its stores have been closed since 23 March and its UK warehouses and distribution networks were also closed temporarily as the group adapted its operations for working safely in a coronavirus world.

We are not expecting a fast recovery, even once lockdown measures are lifted. Indeed, Next itself has set out a series of downside scenarios in which sales decline by up to 40% this year. Even in this scenario, the group expects cash profit (EBITDA) for the year to be positive and year-end net debt to be lower, reflecting cost-cutting and cash conservation measures.

Importantly, we see Next as not only very-well placed to survive this pandemic, but to emerge stronger. As a high margin retailer with a very profitable online business, led by the highly impressive Lord Wolfson for the best part of two decades; we believe Next is in a far better position than most of the competition. We believe COVID-19 will accelerate the demise of Next’s competitors (indeed, this is already happening) enabling Next to gain market share. As surviving clothing retailers look to bulk up their online presence in a post-COVID-19 world, the appeal of Next’s online platform business, which offers a low cost route to market for partner brands, should also increase.