Craneware PLC (LON: CRW) – Progressing well in Q1 FY21 despite the difficulties imposed by the COVID-19 pandemic.

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’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: Annual Report, Company Website)

Growth Prospects and Risk Assessment

Following the growth seen in the first four months of FY21, the Company expects revenue and adjusted EBITDA for H1 FY21 to be ahead of H1 FY20. Moreover, 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.

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 adjusted EBITDA  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.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Craneware Plc.

AGM Update (as on 17 November 2020)

• In the first four months of this fiscal year, the Company saw a return to strong sales growth, which was also considerably ahead of the corresponding period of the previous year.
• For the interim period to 31 December 2020, CRW expects revenues and adjusted EBITDA to be ahead of the same period last year. Also, building a double-digit growth in the future.
• The Board stated that it is confident in the continued robust performance of the business, with new opportunities in the sales pipeline.
• Moreover, the Company is looking to achieve double-digit growth.

Q1 FY21 Trading Update (for the three months ended 30 September 2020, as on 19 October 2020)

• In Q1 FY21, the Company saw a return to strong sales and was in line with the outlook (released in FY20 results). The sales in Q1 increased as compared with the corresponding period of the last year.
• It continues to see substantial new opportunities entering the sales pipeline and while cognisant of the ongoing pandemic.
• Overall, the Board is confident in the continued strong performance of the business.

Financial and Operational Highlights (for the year ended 30 June 2020 (FY20), as on 21 September 2020)

(Source: Company Website)

• Despite the difficulties imposed by the Covid-19 pandemic in the final quarter of 2020, the Company made good progress in FY20 and revenues remained consistent at US$71.5 million (FY19: US$71.4 million).
• While the Company saw an increase of 5% year-on-year in adjusted EBITDA, despite prudent cost management and reductions in certain spend (such as travel).
• Total Sales for the financial year 2020 were ahead of the prior year at US$65.4 million (FY19: US$63.1 million).
• On a year-on-year basis, the profit before tax surged by 5%, basic adjusted EPS increased by 3% and basic EPS was up by 12%.
• The Company continues to convert very high levels of the Adjusted EBITDA reported in the year into operating cash flows and returned US$9.1 million to shareholders by dividend during the year. It has resulted in cash balances of US$47.9 million at 30 June 2020.
• The Board has paid a final dividend per share of 15 pence (18.45 cents), giving a total dividend per share for the year of 26.5 pence (32.60 cents).
• The Company maintains a strong balance sheet, with no debt, cash reserves consistent with the end of the prior year and Total Visible Revenue for the next three years of US$200.1 million.
• In FY20, the capitalised R&D declined to US$9.3 million (FY19: US$9.6 million), despite an overall increase in the R&D spend.
• It witnessed a healthy sales mix, with 90% of sales being to existing customers or new hospitals.

Financial Ratios 

Share Price Performance

On 7 January 2021 (before the market close, at 10.38 AM GMT), CRW’s shares were trading at GBX 2,190.00, down by 0.45% against the previous day closing price. Stock 52-week High and Low were 2,450.00 and GBX 1,300.00, respectively.

From the technical standpoint, 14-day RSI (46.08), 100-day SMA (1835.18), and 100-day EMA (1949.25) are currently supporting an upside potential, which means the stock price could increase in the short term.

In the past six months, CRW’s share price has delivered ~ 31.34% return as compared to the ~ 3.24% return FTSE All Technology index, and a positive ~3.24% return FTSE All Technology index, which shows that the stock has outperformed the benchmark index and the sector.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

Craneware has witnessed a strong sales momentum in Q1 FY20, and it is observing early signs of positive sales recovery. Moreover, the Group 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.

(Source: Presentation, Company Website)

Considering a strong performance in Q1 FY21, robust balance sheet and undrawn debt facilities, paying dividends to shareholders, operational conditions improving towards the normal levels, robust financial and liquidity position, higher profitability margins, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Craneware Plc at the current price of GBX 2,190.00 (as on 7 January 2021, before the market close at 10:38 AM GMT), with lower-double digit upside potential based on 52.74x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

* The dividend yield is subject to change as per the stock price movement.

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