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EMIS - Revenues and profits steady as cash and dividends soar

Nicholas Hyett | 31 August 2018 | A A A
EMIS - Revenues and profits steady as cash and dividends soar

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Emis Group Plc Ord 1p

Sell: 1,282.00 | Buy: 1,288.00 | Change -22.00 (-1.68%)
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Healthcare software provider EMIS saw revenues rise 7% in the first half of the year to £84.5m, with recurring revenues up 4%. However, investment in the Patient business meant underlying profits rose just 1% to £17.6m.

The board has declared an interim dividend of 14.2p, up 10% on last year.

The shares were broadly flat in early trading.

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Our view

EMIS' main business is providing software to GPs and pharmacies, helping them to manage practices and keep patient records.

The business model has plenty of attractions, not least the fact that reinvestment requirements are low, and loyal GP customers generate significant recurring revenues. As a result, profits should be reliable and largely converted into cash, ultimately flowing back to shareholders as dividends.

However, execution has been poor, and all too often the group is failing to live up to its promise. Given that fact, a price to earnings ratio of 18.8 times is hardly cheap, and only a smidgen under the group's long run average.

It would be unfair to blame the group for the headwinds of the NHS's spending squeeze, but there have been own goals too.

The roll out of services in Northern Ireland has been delayed, while a £57.5m deal for Ascribe, now part of the Acute Care Division, has run into problems with its contracts. The latest issue is a failure to properly report data back to NHS Digital, meaning service levels were misleadingly high. We can't imagine NHSD was too pleased.

The group says its current ailments aren't symptomatic of a wider issue. Given that the NHS is EMIS' primary customer, this is a relief. Still, a single customer means keeping them on side is key. Smooth execution will be needed from here on.

For shareholders, EMIS' saving grace has been its impressive cash generation. That's enabled it to quickly repay the debt taken on to fund acquisitions, while still increasing the dividend. The shares currently offer a prospective yield of 3.1%.

With the dividend well supported in the short-term, CEO Andy Thorburn has time to steady the ship. If he can get revenues moving steadily in the right direction shareholders shouldreap the rewards, and EMIS' capital light business model could make it a long term winner.

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Half Year Results

The core Primary, Community & Acute Care business saw revenue rise 3.6% to £60.6m. That was largely thanks to the agreement to sell a legacy product to the Northern Territories government in Australia, offsetting an increase in development and support costs and resulting in flat operating profits of £16.1m.

Revenues in Community Pharmacy grew 13.5% to £12.3m, while profits rose 36.3% to £3.5m. Market share in the division remained unchanged, with growth driven by the roll-out of the latest ProScript Connect software.

Specialist & Care saw revenues rise 20.4% to £10.1m, and delivered an operating profit of £0.4m compared to a small loss last year. Despite historic issues in this sector EMIS has bid for new diabetic eye screening contracts, with results expected by the end of the year.

Meanwhile the fledgling Patient division, which runs websites providing information directly to patients, saw revenues grow 3.9% to £1.5m. However, increased investment meant operating losses increased substantially to £1.7m.

The settlement with NHS Digital, regarding incorrect reporting of service performance, is expected to be covered by the provision made in 2017. However, it has not yet been determined.

The group finished the period with net cash of £32.3m, more than triple that of this time last year, thanks to a significant improvement in operating cash flow.

Find out more about EMIS shares including how to invest

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 for more information.