Investment Summary
 

1. EMIS Group Plc is a market leader in providing various healthcare related services through EMIS Health and EMIS Enterprise.

2. The company operates at a high operating margin which benefits its growth potential.

3. The Group’s recurring revenue forms a major part of its total revenue which shows its ability to sustains its business.

4. The company has consistently shared its income with its investors in the form of dividends.

5. The company is trading near its 52-week low, which makes an excellent opportunity to buy this value stock.
 

Business Overview

EMIS Group Plc (LON: EMIS) is a Leeds, United Kingdom-headquartered provider of healthcare software, information technology and related services through key brands in the UK, which seeks to facilitate improving clinical outcomes and efficiency through connected technology services. The company supplies intelligent analysis software to assist with planning and management and offer front line technology that doctors rely on to manage patient care. The company generates revenue by offering software and software licences, hosting services, business to business services in healthcare, and other support services. The operations of the group are differentiated in two core operating segments, namely EMIS Health and EMIS Enterprise.

Key Statistics



Top Shareholders 
 

(Source: Thomson Reuters)

EMIS Group- A Market Leader


(Source: Preliminary Presentation, Company Website)

EMIS Group is a market leader in providing Healthcare related services. EMIS Health is at 1^st position in terms of market share in providing primary care services while it is at 2^nd position in providing community care services. In acute care A&E segment, it has secured 1^st position in terms of market share.

EMIS Enterprise is at 1^st position in terms of market share in community pharmacy and patients’ services related app while it is at 2^nd position in acute hospital pharmacy in terms of market share.

Segmental Business - Revenue & Adjusted Operating Profit


(Source: Preliminary Presentation, Company Website)

The Group generates 63 per cent of their revenue from EMIS Health while 37 per cent revenue is generated by EMIS Enterprise segment.

In terms of adjusted operating profit, the Group generates 57 per cent from EMIS Health and 43 per cent from EMIS Enterprise.


(Source: Preliminary Presentation, Company Website)

The company generates 78 per cent of revenue which is recurring while 22 per cent of its revenue is non-recurring. The major part of revenue is generated through software & software licenses services (42 per cent) and maintenance & software support services (24 per cent).

Growth Outlook - FY2020
 

1. The company reported current trading in FY2020 in line with its expectations.

2. The Group could witness some delay in its new business revenue due to the Coronavirus uncertainty.

3. EMIS Group is well positioned for the NHS and private healthcare sectors for the fiscal year 2020.
 

Guidance & Trends


(Source: Preliminary Presentation, Company Website)

The above chart shows the guidance and trends of the company related to its costs, capital expenditure, tax, working capital, dividends and acquisitions.

Uncertainty Regarding Coronavirus

The Group is supporting its NHS and community pharmacy to tackle this crisis. The Group is providing free video capability and supporting GP practices. The Group has enabled flexible working through EMIS Anywhere. EMIS has created some functionality in EMIS Web related to Coronavirus. The Group is also focusing on potential for NHS market investment post Coronavirus.

Financial Highlights – Financial Year 2019


(Source: Preliminary Report, Company Website)

In the fiscal year 2019, the company’s total revenue grew by 7 per cent to GBP 159.5 million as compared to GBP 149.7 million in the fiscal year 2018. Recurring revenue increased by 4 per cent to GBP 125 million in FY2019 against GBP 120.6 million in FY2018 due to strong overall performance and benefiting from the licensing services. Adjusted operating profit during the period was up by 9 per cent to GBP 39.3 million versus GBP 35.9 million in the same period last year due to increased level of investment in development across the business during the year. On reported basis, operating profit declined by 3 per cent to GBP 26.8 million in FY2019 against GBP 27.7 million in FY2018. Net cash during the period increased by GBP 15.5 million to GBP 31.1 million. Adjusted earnings per share during the period increased by 14 per cent to 51.4p as compared to 45.1p in the fiscal year 2018. Total dividend for the year increased by 10 per cent to 31.2p as compared to 28.4p in the last year.

Key Performing Indicators


(Source: Preliminary Presentation, Company Website)

The above chart shows the financial growth of the company in the last five years. Total revenue increased from GBP 143.2 million in FY2015 to GBP 159.5 million in FY2019 while the adjusted operating profit grew from GBP 34.6 million in FY2015 to GBP 39.3 million in FY2019. The Group has consistently given dividends from 21.2p in FY2015 to 31.2p in FY2019.

Financial Ratios

 
(Source: Thomson Reuters)

The reported EBITDA margin in H1 FY19 was 34.60 per cent against the industry median of 31%. The reported operating margin was 15.1 per cent for the H1 FY19. Net margin reported was 12.30 per cent for the first half of the fiscal year 2019, lower from the industry median of 16.4%. Return on equity for the same period stood at 9.70 per cent. On the liquidity front, EMIS Group Plc current ratio stood at 1.02x. On leverage front, the debt-equity ratio of the EMIS Group Plc’s was 0.03 i.e. the company is less leveraged than the industry with debt-equity ratio of 0.10.

Share Price Performance


Daily Chart as on 19^thMarch 2020, before the market closed (Source: Thomson Reuters)

On March 19, 2020, at the time of writing (before the market close, at 8:54 AM GMT), EMIS Group Plc shares were trading at GBX 797, down by 1.97 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 1,262/GBX 722. The group’s stock is reflecting lower volatility as against the benchmark index based on the company’s beta of 0.8324. The outstanding market capitalisation was around £514.72 million.
From the technical standpoint, 14 days-Relative Strength Index of the stock is hovering near the oversold zone, which is strengthening the upside move.

Valuation Methodology

Method 1: EV to EBITDA Approach (NTM)



To compare EMIS Group Plc with its peers, EV/EBITDA multiple has been used. The peers are Micro Focus International Plc (NTM EV/EBITDA was 4.87), Insterm Plc (NTM EV/EBITDA was 9.89), Sage Group Plc (NTM EV/EBITDA was 13.65), Nexus AG (NTM EV/EBITDA was 10.02), Craneware Plc (NTM EV/EBITDA was 14.66)  and Aveva Group Plc (NTM EV/EBITDA was 19.07). The Average of EV/EBITDA (NTM) of the company’s peers was 12.03x (approx.)

Method 2: Price to Earnings Approach (NTM)



To compare EMIS Group Plc with its peers, P/E multiple has been used. The peers are Micro Focus International Plc (NTM P/E was 2.61), Insterm Plc (NTM P/E was 17.29), Sage Group Plc (NTM P/E was 18.99), Nexus AG (NTM P/E was 23.11), Craneware Plc (NTM P/E was 23.38)  and Aveva Group Plc (NTM P/E was 24.64). The median of P/E (NTM) of the company’s peers was 18.99x (approx.)

Valuation Metrics


(Source: LSE)

As on 28^th February 2020, the Price to Earnings ratio of the EMIS Group Plc’s was around 31.70 which was in the middle range as compared to its peers which shows that the company’s stock price has potential to grow than the respective industry. The company’s EV/EBITDA multiple is 13.9x which was in the middle range as compared to its peers which shows that the company stock price could increase.


(Source: LSE)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE. In 2020, the ROE is increasing as compared to its peers.

EMIS Group V/S FTSE-AIM Price – 1 Year


(Source: Thomson Reuters)

In the last one year, EMIS Group Plc share price has delivered negative 15.84 per cent return as compared to negative 37.43 per cent return of FTSE-AIM index, which shows that the stock has outperformed the index during the last one year.

Dividend Yield


(Source: Thomson Reuters)

EMIS Group Plc has a dividend yield of 3.84 per cent which is higher than the industry dividend yield of 3.45 per cent and the sector dividend yield of 3.15 per cent.

EMIS Group V/S Industry V/S Sector – 1 year


(Source: Thomson Reuters)

In the last one year, EMIS Group Plc share price declined by 15.84 per cent which is lower than the industry decline rate of 26.30 per cent and sector decline of25.51 per cent.

EMIS Group Total return - 1 year


(Source: Thomson Reuters)

In the last one year, EMIS Group Plc has delivered a total return of negative 13.46 per cent while the FTSE All share index has delivered a total return of negative 27.83 per cent.

Growth and Risk Assessments

In the mid-term, the Group is targeting operating margin towards 30 per cent and an even split of revenue derived from the NHS and enterprise sectors, with mid-to-high single-digit revenue growth. Through new sales and operational leverage, the group aims to self-fund EMIS-X, the new technology platform. However, there are several risks that the company might not be able to achieve its targets. To improve efficiency and reduce costs, the National Health Service has directed to use IT, upon which the commercial success of the company is dependent. But there is a risk that this will change with successive governments or products and services of the group are not in line with the strategy of NHS. Moreover, there is a risk that the group might not be able to sell its products and services to the NHS if it does not meet the healthcare technology requirements of the government, especially if the company fails to achieve integration between its systems or with third-party systems.

Conclusion

The company reported decent financial performance in the fiscal year 2019, with growth in both revenue and adjusted operating profit. The Group has made progress on growth initiatives for the mid-term by launching phase one of our Patient Access marketplace. EMIS Group has made bolt-on acquisition of Pinnacle business which would benefit community pharmacy. EMIS Group has a robust business model which would benefit the company in the long term. The Group is well positioned to tackle the recent outbreak of Coronavirus and uncertainties related to it. There could be some delay in new business revenue due to Coronavirus. The company’s current trading in the new financial year is in line with its expectations. The Group has also delivered good operational progress across the organisation. The Group is focusing on delivering its strategic plan of innovation and growth which could cater the immediate market uncertainty.

Over the course of 4 years (FY15 - FY19), the company’s total revenue increased from GBP 143.2 million in FY2015 to GBP 159.5 million in FY2019. Compounded annual growth rate (CAGR) stood at 2.73 per cent.

Based on decent prospects and support from the valuation as done using the above two methods, we have given a “Speculative Buy” recommendation at the current price of GBX 762 (as on 19th March 2020 at 9:37 AM GMT) with lower double digit upside potential, based on 12.03x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.) and 18.99x NTM P/E (approx.) on FY20E earnings per share (approx.). The speculative view is in consideration of the prevailing market volatility, risks highlighted above and the success of the new tech-driven platform. 

 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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