Craneware PLC (LON: CRW) – Invests Continuously in Innovation and R&D to Capitalise on the Growing Market Opportunity.

Craneware PLC is a FTSE AIM 100-listed Company, which is involved in the licensing, development, and support of computer software for the healthcare industry in the United States. It is a market leader in automated value cycle solutions that help healthcare organizations in improving financial performance. The Company mainly provides five solutions, i.e. Patient Engagement, Charge Capture & Pricing, Coding Integrity, Cost Analytics, and Revenue Collection & Retention. The Company’s Cost & Margin Analytics solutions enable healthcare providers to conduct profitability analysis across patient episodes and determine department performance. Craneware collaborates with US healthcare providers and assists them in planning, executing, and monitoring of value-based economic performance. The Company was founded in May 1999, and presently, it serves nearly one-third of all registered US hospitals with over 350 employees.


 (Source: Company Website)

Key Fundamental Statistics



Segment Analysis

Most of the Group operations are located in the United States. The Company bifurcates the revenue in two types of services – Software licensing and Professional Services. In 2019, Software and Professional Services contributed 85% and 15% of the total revenue, respectively.


 (Source: Annual Report,  Company Website)

Synopsis of Recent Developments

8 July 2020: The Company affirmed the cash reserves of $47.6 million (approximately) with no debt on the balance sheet. The Board intends to pay the final dividend for FY20; however, the dividend will be announced in September 2020, depending on the market conditions.

Operational Highlights of FY19

The Company reported a healthy sales mix in FY19, with 45% of sales relating to new customers. Moreover, the ongoing transition of the US healthcare market to value-based care is supporting the Company’s software product suite. While it has been investing in the future market opportunities to gain new customers, the Group’s strength lies in the recurring revenue streams, which makes them a resilient player even in the challenging market conditions.


 (Source: Presentation, Company Website)

Top Shareholders Statistics
 
 

Update on Trading Performance (8^th July 2020)

Despite the disruption caused due to the covid-19 outbreak, the Company expects total revenue to be around $71.4 million in FY2020 (FY2019: $71.4 million) with an adjusted EBITDA of around $24.5 million for the period (FY2019: $24 million). The trading performance had been strong for the first nine months before the outbreak with total sales over 30 per cent versus the last year for the same period. The Group’s sales, project delivery, professional services, the associated up-sales and the completion of renewals in the fourth quarter were impacted due to the imposed lockdown and travel restrictions, which resulted in expected total sales to be marginally ahead of last year’s sales at $65 million (FY2019: $63.1 million). The Company’s Customer churn was less than 10 per cent for the FY2020, in line with historical norms. The Company has done sensible investments and focused on controlling costs throughout the year. CRW has not utilised support from governments in the US or in the UK. The Company has a robust balance sheet with cash reserves of around $47.6 million (30^th June 2019: $47.6 million) without any debt. The Group also have access to undrawn debt facilities amounting to $50 million and is well-positioned to take benefits if any market opportunity arises. The Board is committed to paying a dividend for the year ending 30^th June 2020 and will be announced in September 2020.

Financial Highlights – Decent Performance in H1 Financial Year 2020 (31st December 2019)

             

(Source: Interim Report, Company Website)

In the first half of the financial year 2020, driven by strong growth of new sales for the period, the group’s revenue stood flat at $35.9 million (H1 FY2019: $35.8 million). The company’s adjusted EBITDA increased by 10 per cent $12.7 million in the first half of the financial year 2020 (H1 FY2019: $11.6 million). The PBT (profit before tax) surged by 3 per cent to $9.6 million in the first half of the financial year 2020 (H1 FY2019: $9.3 million in H1 FY2019). The company’s adjusted basic earnings per share went up by 3 per cent to 31.1 cents in H1 FY2020 (H1 FY2019: 30.2 cents). The cash reserves stood at $45 million in H1 FY2020 versus $38.7 million in H1 FY2019. The group’s interim dividend stood at 11.5 pence in H1 FY2020 versus 11.0 pence in H1 FY2019, reflecting an increase of 5 per cent for the period.

Financial Ratios – Strong Profitability Margins and Liquidity Position versus the Industry Median

Reported profitability metrics for the first half of the financial year 2020 were higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. Craneware Plc has delivered a substantial return for the shareholders’ as Return on equity of 12.6% was higher as compared to the industry median of 12%. It reflects efficient utilisation of the equity capital for the business operations. On the liquidity front, Craneware Plc’s current ratio was higher than the industry median of 1.43, reflecting sufficient liquidity to meet the short-term obligations. On leverage front, the debt-equity ratio was 0.04x, which was significantly lower as compared to the industry median of 0.16x, reflecting that the company is less leveraged as compared to the industry.  

Share Price Performance Analysis


Daily Chart as on 9^th July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On July 9, 2020, at the time of writing (before the market close, at 8:34 AM GMT+1), Craneware Plc shares were trading at GBX 1,675.00, down by 0.89 per cent against the previous day closing price. Stock 52 week High and Low were GBX 2,700.00 and GBX 1,300.00, respectively.

Bullish Technical Indicator

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology

Price/Earnings Approach (NTM)



To compare Craneware Plcwith peers, Price/Earnings multiple has been used. The peers are RaySearch Laboratories AB (Price/NTM Earnings was 49.33), First Derivatives Plc (Price/NTM Earnings was 47.92), EMIS Group Plc (Price/NTM Earnings was 31.02), iomart group Plc (Price/NTM Earnings was 27.87) and Visiodent SA (Price/NTM Earnings was 21.07). The Average of Price/NTM Earnings of the company’s peers was 35.44x (approx.).

Craneware Plc Vs FTSE-AIM Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, Craneware Plc share price has delivered 155.73 per cent returns as compared to 32.83 per cent returns of FTSE-AIM index, which shows that the stock has outperformed the index during the last five years.

Industry Outlook Dynamics

As per the recent publication from Meticulous Research, the market size for healthcare IT market is projected to reach US$ 511.06 billion by 2027, reflecting a CAGR (compounded annual growth rate) of 13.8% between 2019 to 2027. The growth drivers of the industry include rising ageing population in the US and the nature of the country’s fee-for-service system. The market size for information systems in US hospitals was anticipated to grow at a CAGR of 5.7% between 2014 to 2020. The US healthcare market is gradually shifting towards value-based care model from a fee-for-service reimbursement model. Moreover, the US has the highest spend per capita on healthcare.

Growth Prospects and Risk Assessment

The Company has a robust pipeline for the current financial year, and hence, it has been performing as per the management expectations. Moreover, it has been progressing well with the development of cloud-based Trisus Enterprise Value Platform. It has a market-leading position, which caters to one-third of all registered US Hospitals. The Company continuously invests in research and developments to capitalise on the growing market opportunity. As the Company generates a substantial portion of the revenue through recurring revenues, it has reliable visibility of revenue streams for the next three years, which is shown in the picture below:


(Source: Annual Report, Company Website)

The Company keeps on launching new platforms and upgrade the old products & services to become one of the market leaders in the healthcare technology sector. CRW was the first to introduce automated chargemaster management solution to the healthcare sector in the US. The Group has declared decent operational performance and well-positioned balance sheet for the current period. The Company is confident towards the business model and management team to tackle the uncertain times. The new business in the pipeline will help the Company to expand operations and to gain more market share.The Company, through the wide-ranging scope, had accelerated growth organically and through acquisitions and strategic partnerships.

The increasingly complex regulatory environment poses tremendous pressure regarding data and cybersecurity. Moreover, the failure to register, protect, and enforce the Company’s Intellectual Property Rights could materially impact the Group’s future performance. The ongoing challenges regarding Covid-19 and Brexit are also posing uncertainties to the business operations. Being an IT company, the CRW needs to invest heavily in innovation and system maintenance and, any failure to do so will impact the brand royalty and may affect the company’s financial performance. Excessive competition in the industry could affect the revenue and profitability of the Group. Fluctuation in foreign exchange rates could affect the profitability of the Company. 

Business Outlook Scenario

Craneware is making progress towards the strategic aim to become ubiquitous in the Hospitals based in the US with a focus on artificial intelligence capabilities. The Group expects its Trisus platform to deliver a strong performance as hospitals are facing financial challenges along with the transition to value-based reimbursement. Despite the easing given by the government, the healthcare providers remained in pressure and taken steps to bring resilience across operations. CRW is committed to helping them by providing regulatory information, data and tools consistently. The Company’s data team is monitoring guidance related to coding and billing for COVID-19 testing and publish bulletins, which are used by customers and non-customers. The Group also witnessed record levels of attendees in the free-to-attend COVID-19 webinars, exhibiting the need by the healthcare market for guidance and insight. The Group’s operations are benefited from higher recurring revenue and contribute around 85 per cent of total revenue. The Company entered FY2021 with over $65 million of the annuity revenue base and have sales discussions with the US-based hospitals.

Over the course of 4 years (FY15 - FY19), the company’s revenue surged from $44.82 million in FY15 to $71.40 million in FY2019. Compounded annual growth rate (CAGR) stood at 12.35 per cent.
 
Based on the fundamental prospects and support from valuation done using the above method, we have given a “Speculative Buy” recommendation at the current price of GBX 1,675.00 (as on 9^th July 2020, before the market close at 8:34 AM GMT+1) with lower double-digit upside potential based on 35.44x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement. 

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