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EMIS - strong numbers and now looking to the private sector

George Salmon | 20 March 2019 | A A A
EMIS - strong numbers and now looking to the private sector

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Emis Group Plc Ord 1p

Sell: 1,294.00 | Buy: 1,298.00 | Change -10.00 (-0.76%)
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EMIS full year revenue rose 6% to £170.1m, with adjusted operating profit up 1% to £37.6m. Both are ahead of consensus forecasts.

The shares rose 2.8% on the news.

The final dividend rose 10% to 14.2p .

View the latest share price and how to deal

Our view

EMIS provides 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, loyal GP customers generate significant recurring revenues and improving IT infrastructure is a clear priority for the NHS. As a result, profits should be reliable, ultimately flowing back to shareholders as dividends.

However, the group isn't quite living up to its promise. It would be unfair to blame it for the headwinds of the NHS' spending squeeze, but there have been own goals too.

A £57.5m deal for Ascribe, now part of the Specialist Care Division, ran into problems with its contracts. Then there was the failure to properly report data back to NHS Digital (NHSD), with EMIS reporting misleadingly high service levels.

Still, we think there are reasons for optimism. A settlement has been reached with NHSD, and the group's confident there's not a wider issue. In the meantime, cash generation has remained strong, enabling EMIS to quickly repay the debt taken on to fund acquisitions, pay the settlement and still increase the dividend. The shares currently offer a prospective yield of 3.2%, and trade on 18.7 times expected earnings, slightly below the longer-term average.

We also like what new chief executive Andy Thorburn is doing. He's steadied the ship somewhat in these last 12 months, and his longer-term strategy to diversify EMIS is sensible. As things stand, the NHS is pretty much the be-all, end-all, and that's a risk. Thorburn wants the private sector to contribute 50% of EMIS' revenues, and has his eye on opportunities in the medicine supply chain and the existing patient business.

Add the longer-term potential to deliver the joined-up healthcare system the country wants, and EMIS could yet be a long term winner. But smooth execution will be needed from here on, especially with recent disappointments still fresh in the memory.

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Full year results details

Market share rose in each part of the Primary, Community and Acute Care division, helping revenue rise 3% to £121.7m. However, the challenges of meeting commitments with NHS Digital meant adjusted operating profit declined 4% to £33.6m. The cost base looks set to remain elevated as EMIS rolls out EMIS-X.

Primary Care services in Scotland are being renewed, but the customer base in Wales will fall over 2019 and 2020. The new structure of EMIS Health is designed to match the regional approach of the NHS, while a trial to make GP data available in hospitals is ongoing.

Upgrades to Community Pharmacy's ProScript Connect product have gone well, with over 95% of the direct customer estate upgraded to date, and 54 new contract wins in 2018. Revenue rose 14% to £25m, with profits rising from £5.6m to £7.6m. In 2019, EMIS will seek to introduce new services to like flu jabs and travel vaccinations.

Specialist Care, England's leading diabetic retinal screening provider, saw profits rise from £0.2m to £1.1m, while the Patient.info business saw engagement continue to rise but losses increased to £3.2m

Higher operating cash flows helped the group's net cash position rise from £14m to £15.6m, despite £10.4m of exceptional costs.

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.