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EMIS - trading remains in line with expectations

Nicholas Hyett, Equity Analyst | 6 May 2020 | A A A
EMIS - trading remains in line with expectations

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Emis Group Plc Ord 1p

Sell: 1,866.00 | Buy: 1,868.00 | Change 2.00 (0.11%)
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Trading so far this year has been in line with management expectations.

The group had cash of £40m at the end of April, with a further £60m in undrawn banking facilities. The final dividend of 15.6p per share, totalling £9.8m, will be paid on 11 May as anticipated.

As a result of flexible working introduced by customers new business sales have been lower than last year, and weighted towards lower-margin hardware.

The group continues to invest in long term initiatives rather than taking short term cost saving measures.

The shares were broadly flat in early trading.

View the latest EMIS share price and how to deal

Our view

EMIS provides software to GPs and pharmacies, helping them to manage practices and keep patient records. Its products will be right at the heart of the UK's coronavirus response, yet the group expects to see relatively little impact from the virus outbreak.

It's GP customers are signed up to long term contracts and although the group is making certain services available to customers free of charge and rolling out coronavirus specific functionality, the cost of doing so is minimal.

It's an indication of the fundamental attractiveness of the software as a service (or SaaS in industry jargon) model. Building the platform is expensive, time consuming and requires significant expertise - however adding another customer is essentially costless. That makes EMIS very cash generative with a reasonably low cost base - both excellent qualities in the current climate. Add in a net cash position and the group should be well placed to withstand the market turmoil.

Long term the business model has plenty of attractions too. 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.

While the group hasn't always lived up to its promise, Chief executive Andy Thorburn has steadied the ship since taking the helm in 2017. Cash generation has enabled EMIS to quickly repay the debt taken on to fund acquisitions and still increase the dividend. The shares currently offer a prospective yield of 3.3%.

We think Thorburn's longer-term strategy makes sense - selling off non-core divisions, while increasing EMIS' exposure to private sector contracts. As things stand, the NHS is pretty much the be-all and end-all. While it's customers are reliable there's always a risk a competitor muscles in and decimates your revenue stream. 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 in the potential to deliver the joined-up healthcare system the country wants, we believe it could do well over the long term.. The shares have performed better than the wider market in recent months and as a result the company now trades on a PE ratio of 19.9, slightly above the long term average of 19.3.

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Full Year Results (18/03/20)

EMIS' full year revenues rose 7% to £159.5m, with recurring revenues up 4% to £125m. Underlying operating profits were up 9% to £39.3m.

The board proposed a final dividend of 15.6p, taking the full year total to 31.2p per share, both are up 10% on a year earlier.

The group does not expect to see significant disruption as a result of the coronavirus outbreak.

The core EMIS Health business maintained its market position during the year, with 57% of the UK GP market and slight improvements in community pharmacy and acute A&E market share (at 21% and 23% respectively). Development of the next generation EMIS-X is ongoing. Divisional revenues rose 1.6% to £100.9m, although increased investment in EMIS-X meant underlying operating profits fell 7.5%.

EMIS Enterprise, which includes non-NHS sales and the Patient website business, saw its share of the community pharmacy business slip slightly to 36%, with hospital pharmacy also down at 35%. Registered users of the Patient website rose 40% to 8.4m, booking 6.7m GP appointments and 20.2m repeat prescriptions. Patient has now been rolled out to include services provided by community pharmacies. Revenue in the division rose 16.3% to £58.6m, with underlying operating profits up 36.7% to £17.7m.

The group incurred restructuring costs of £5.4m during the year, reflecting a decrease in overall staff numbers, moving to new offices and the disposal of the Specialist & Care business. After the end of the financial year EMIS acquired the PharmOutcomes platform, which services community pharmacists, for £3m cash (plus up to £4m based on performance).

EMIS generated £32.3m of free cash flow during the year, up from £31.1m in 2018. That supported an almost 100% increase in net cash held on the balance sheet, which reached £31.1m. The group remains committed to growing dividends in line with profits.

While EMIS does not expect to see significant negative fallout from the coronavirus outbreak, the virus may delay new business growth in the short term.

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.

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