EMIS has announced the disposal of its non-core Specialist & Care business to Northgate Public Services (UK) Limited for £14.9m.
The shares rose 2.1% on the news.
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 hasn't quite lived 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. The soon to be sold Specialist Care Division ran into problems with its contracts, and then there was the failure to properly report data back to NHS Digital (NHSD).
Still, we think there are reasons for optimism. Chief executive Andy Thorburn has steadied the ship in these last 12 months, with a settlement reached with NHSD drawing a line under that 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 2.9%, and trade on 20.4 times expected earnings, slightly below the longer-term average.
We think Thorburn's longer-term strategy makes sense too -selling off non-core divisions like Specialist & Care, while also increasing EMIS' exposure to private sector contracts. 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. We like the changes the group has made, but smooth execution will be needed from here on, especially with recent disappointments still fresh in the memory.
Full year results (20 March 2019)
Full year revenue rose 6% to £170.1m, with adjusted operating profit up 1% to £37.6m. Both were ahead of consensus forecasts. The final dividend rose 10% to 14.2p.
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.
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.
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