EMIS Group have released half year results for the period to 30 June 2016, which are broadly in line with the board's expectations. The shares opened slightly down this morning.
As previously communicated, reported results are impacted by the £2.2m cost reduction programme, with the benefits expected to come through in the second half.
Total revenue for the period was £78.7m, up 1%. The lower growth rate is, in part, attributed to a limited contribution from acquisitions (£0.7m in the period) and headwinds in NHS spending, with a slower than expected rate of contract awards in larger NHS procurements, especially in the secondary and specialist care division. Recurring revenues grew by 6% to £64m.
Adjusted operating margin improved from 21.7% to 22.5%, assisted by tight cost control. Adjusted operating profit for the period was £17.7m, up 5%.
Primary & Community Care, the largest division, maintains its 55% market share, with revenue and adjusted operating profit growing by 4% and 10% respectively. Performance was boosted by the revenues and profits from the ePEX (acute mental health) product moving from the Secondary & Specialist Care division. Market share in Child Community & Mental Health reached 14% with seven new contract wins, with a good pipeline of opportunities for H2 and 2017.
Secondary & Specialist Care saw revenue decrease by 8% with adjusted operating profit down 35%, which was largely in line with expectations, following a strong comparative period for project delivery and the difficulties within the division earlier this year. EHSC was awarded a contract for a Patient Administration System in Northampton for delivery in 2016 and has maintained a strong flow of mid-size to smaller contracts.
Revenue in the Community Pharmacy division grew by 6%, with adjusted operating profit up 13%. Market share, currently 36%, is expected to grow from over the next 18 months to close to 50% as the AAH Pharmaceuticals (Lloyds) estate deploy EMIS.
The board remains positive on the outlook for the Group, and the interim dividend is increased by 10% to 11.7p. The outlook for the full year remains unchanged.
EMIS' Secondary Care & Specialist division has spluttered somewhat recently, and the group has seen slower than expected growth in larger NHS contracts. However, in the longer term, we feel that technology is only going to play a bigger role in delivering the joined-up healthcare that the nation wants.
EMIS has a strong market share in its main businesses, providing software for GPs and pharmacies to manage their practices and patient record keeping. With over 75% of the Group's English GP practices being EMIS Health users for more than a decade, the group has a loyal client base which generates strong recurring revenues.
Robust cash generation is another feature of the EMIS business model. Their high market shares mean that every pound invested in developing their product is repaid several times over because of the sheer numbers of pharmacies and GP practices that are signed up to the core products.
From 2007 to 2015, EMIS spent a total of £55m on capital expenditure, but generated £145m of free cash flow. This has helped the debt that was taken on to fund acquisitions over the last few years, including 2013's £57.5m deal for Ascribe, be repaid quickly. The group is now in a net cash position again.
We feel that these characteristics should offer investors some assurance if the clouds that have blown over after the Brexit vote get a little darker. However, with the new residents of numbers 10 and 11 Downing Street still settling in, it will be worth keeping an ear out for any comments about their plans for NHS funding as EMIS is directly exposed to the budgets of healthcare organisations.
Hopefully EMIS will revert to its usual form of steady delivery of recurring revenues at high margins from the core divisions, without any more fireworks from Secondary Care. The shares offer a prospective yield of 2.5% and trade on a forward P/E of 19.9x, in line with their long run average of 19.3x. We still consider them to offer a well above average quality of earnings, which ought to look increasingly attractive in an ever more unsettled world.
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