EMIS has agreed to be bought by health services firm Optum UK, for about £1.24bn. The offer of 1,925p per share is a 49% premium to EMIS' closing share price the day before the offer was announced.
The deal is subject to shareholder approval, and EMIS' directors intend to unanimously recommend that shareholders vote in favour of the takeover.
The shares have risen 39.8% since the announcement shortly before the market closed on Friday 17 June.
We must admit there's merit to the proposed takeover- the premium on offer is hard to ignore. But we'd also be sad to see the group taken into private hands - we think EMIS has long-term strengths. With that said, no one has signed on the dotted line yet, so it's crucial investors keep the bigger picture in mind.
EMIS provides software to GPs and pharmacies, helping them manage practices and keep patient records. And the group has ended the year with a decent looking bill of health.
Its products have been right at the heart of the UK's coronavirus response. It's Outcomes4Health product was at one point the only system capable of recording vaccines done outside a hospital setting. Other products have also seen demand surge as healthcare services are increasingly delivered digitally, which should translate into a longer-term benefit.
One of the things we admire most about EMIS is its recurring revenues. 80% of group revenue comes from this channel, which gives it excellent revenue visibility - a real asset in an uncertain market. That said, we are mindful that one-off revenue is still growing faster than recurring. This isn't the end of the world, but we would ideally like to see a higher proportion of customers nudged onto favoured subscription models.
Those worries aside we think EMIS's software as a service (or SaaS in industry jargon) model is fundamentally attractive. Building the platform is expensive, time consuming and requires significant expertise, but adding new customers is essentially costless. That should make EMIS, with its long-term contracts, 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 is well placed to withstand 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. Over half of the UK's GP's use EMIS' software. As a result, profits should be reliable, ultimately flowing back to shareholders as dividends.
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 around 3.0% although remember these are variable and not a reliable indicator of future income.
As things stand, the NHS is pretty much the be-all and end-all. While it's a reliable customer, there's always a risk a competitor muscles in and decimates your revenue stream, There's also the risk of NHS spending becoming a political football.
CEO Andy Thorburn wants the private sector to contribute 50% of EMIS' revenues, and has his eye on opportunities in the medicine supply chain and expanding the patient information business. That could underpin long term growth, but it's still early days.
We believe there's potential at EMIS. However, the market has become excited by the prospect of a buyout, and if the deal falls through there will likely be a sharp short-term reaction.
Full Year Results (17 March 2022)
Full year revenue rose 6% to £168.2m, of which 80% is recurring revenue, and also includes a £7.4m benefit from the acquisition of Pinnacle. The total also reflects double-digit growth in EMIS Enterprise and underlying operating profit rose 11% to £43.5m. Results were above expectations.
EMIS said: ''We have completed the first phase of our EMIS-X technology refresh, with the next phase of cloud infrastructure upgrades in EMIS Health planned over the next two years to increase efficiency and expand margins''.
A final dividend of 17.6p per share was announced, taking the total payment for the year to 35.2p, up 10% on 2020.
In EMIS Health, EMIS' UK GP market share position rose to 58% from 57%. Revenue rose slightly to £107.9m, reflecting normalised trading following an increase of hardware sales last year. Hardware sales are less lucrative, so fewer of these meant underlying operating profit rose 5% to £26.3m.
EMIS Enterprise, an area of strategic priority for the group, saw revenue rise 17% to reach £60.3m. The division also benefitted from supporting the NHS Covid vaccination programme, helping underlying operating profit rise 21% to £18.9m.
The group's biggest source of revenue came from software subscription and support products (£104.5m).
Total staff costs increased 9%, reflecting the competitive recruitment landscape and EMIS had 1,429 members of staff at year-end, down from 1,591. Other operating expenses rose 17% to £26.7m.
EMIS generated free cash flow of £40.3m, compared to £50.0m last year. The reduction partly reflects the timing of tax payments. Net cash stood at £64m, up from £53m.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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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