EMIS Group PLC (LON: EMIS) – Focus on supporting NHS and Community pharmacies

EMIS Group PLC is a UK based healthcare technology company. The Company provides innovative technology solutions to improve the efficiency in the healthcare industry and get better patient outcomes. EMIS Group mainly caters to the National Health Service (NHS) and business-to-business (B2B) healthcare industry. The key healthcare segment for the Company includes primary, community & acute A&E markets, specialist ICT infrastructure, hardware and engineering services and non-clinical software into health and social care. EMIS Group categorises the business under EMIS Health and EMIS Enterprise. The Company generates a significant portion of its revenue from the primary, acute and community market. The key brands of the Company include EMIS Health, a clinical software that supplies technology to healthcare organisations across major UK healthcare sector. Egton, it is dedicated to providing specialist ICT infrastructure, hardware and engineering services to healthcare and social care. Patient, it is an independent provider of patient-centric medical and well-being information. The Company is listed on FTSE AIM UK 50 Index.

(Source: Company website)

Growth Prospects and Risk Assessment

EMIS Group is focussed on developing technology to deliver the product roadmap for all its NHS markets. The Company is making good progress on the EMIS-X platform.  The Group continues to work and develop the software and frequently releases software and system updates that help in achieving clinical excellence. The release of new tools helps the GPs to rapidly diagnose the patient with the help of atrial fibrillation. The softwares also have a digital method that interacts directly with the Medicines and Healthcare products regulatory agency and reports adverse drug interaction. The technology developed and deployed by the EMIS Group is supporting the NHS to achieve its long-term goal of digitalisation of the UK’s healthcare system.

Recently, the Company was fast enough to develop and deliver covid-19 updates into its software products for the community, primary, acute and pharmacy markets. The software was enabled with functionality to send the covid-19 test results to 95% of the GP systems in England. Symphony, the A&E software system off the EMIS Group, provided the technology for fast and efficient tracing reports for urgent and emergency care. The Company is seeing a rising opportunity in the healthcare analytics space, and it is well poised to deliver growth.

(Source: Company website)

The Company is highly exposed to healthcare structure, and procurement changes as the English primary care are the largest single source of revenue. It is in the business of healthcare technology and physical failure of the systems during the development, implementation or use. The failure to detect and rectify software defects could result in reduced customer satisfaction. If the Company fails to deliver modern software platforms that can integrate with the healthcare services, it could impact EMIS Group’s ability to meet the government’s technical requirement.    

Industry Outlook Dynamics

National Health Service’s (NHS) long-term plan is improving the integrated care, which would be delivered through technology. The NHS has set a target that by 2023-2024 every patient will be offered digitally-enabled primary care, and it has committed to increasing healthcare and primary spending by £4.5 billion. The future of healthcare is that for every task and patient interaction, healthcare will rely on IT. The technology will play a crucial role in the digital transformation of the NHS, and it will improve services and outcomes for patients. In the UK, STP will drive the digital transformation in collaboration with the NHS.

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

 A Glimpse of Business Segments (H1 FY20)

Financial and Operational Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 9 September 2020)

(Source: Company Website)

• EMIS Group had launched the new EMIS-X Analytics application and developed new Patient marketplace services (in the UK).
• The Company’s revenue and adjusted operating profit were slightly lower for H1 FY20, while the recurring revenue (+5%), reported operating profit (+38%) and cash flow from operations (+23%) were increased as compared with the corresponding period of the last year.
• In March 2020, EMIS Enterprise has strengthened the position through the acquisition of Pinnacle. This acquisition will provide new services more quickly to pharmacy customers.
• EMIS Health has maintained the UK GP market leadership position with a 57% of market share.
• The reported basic and diluted earnings per share (EPS) from continuing operations were increased to 22.9 pence and 22.8 pence, respectively (H1 FY19: 15.7 pence and 15.6 pence, respectively).
• The Board has declared an interim dividend per share of 16 pence, an increase of 3% year-on-year. The interim dividend was payable on 5 November 2020 to shareholders on the register at the close of business on 9 October 2020.
• In the community market, EMIS Health retained the number two market position in the first half of 2020. While in acute A&E, the Company has maintained the market leadership position.
• In community pharmacy, EMIS Enterprise has maintained the market share at 37% (31 December 2019: 37%). In hospital pharmacy, EMIS Enterprise has maintained the number two market position with a market share of 37% (31 December 2019: 35%).
• On 30 June 2020, the net cash increased by ~65% year-on-year to £44.1 million, with available undrawn bank facilities of £30 million committed until June 2021.
• Cash generated from operations for H1 FY20 was £36.6 million (H1 FY19: £29.8 million), with a gross capital expenditure of £0.9 million (excluding capitalised development costs).
• Overall results were in line with expectations, with continued strategic progress and strong recurring revenues.
• It is also well-positioned for growth in the mid-term, with continued investment in digital capabilities and also growing registered user base to 10.0 million in the period from 8.4 million.

Share Price Performance Analysis

On 19 November 2020, at the time of writing (before the market close, at 9:10 AM GMT), EMIS Group Plc shares were trading at GBX 977.00, down by 0.20% against the previous day closing price. Stock 52-week High was GBX 1,250.00 and Low of GBX 722.00, respectively. From a technical standpoint, we could see a positive movement in the share price based on the 14-day RSI (42.46).

Based on 2-year performance, EMIS Group performed better than the FTSE AIM UK 50 index, whereas the performance was lower than the FTSE All-Share Software & Computer Services index. EMIS Group generated a return of around 7.1%, whereas the FTSE AIM UK 50 index return was close to 5.09%, The FTSE All-Share Software & Computer index return was about 13.62%.

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

Business Outlook Scenario

The Company delivered a resilient performance in H1 FY20 despite the impact of the pandemic. The recurring revenue of the Company witnessed a year on year growth during the first half of the financial year. Given the robust performance in H1 FY20, the Company announced the interim dividend better than the previous year. Since the reopening of the UK’s economy after the lockdown, the business trading conditions have improved. The core business services continue to remain healthy, and the market share in major markets is unchanged. EMIS Group expects the business product mix to be more normal in H2 FY20 and FY21. The Company expects the regular tenders to remain competitive over the coming years.

The Company drafted a strategic roadmap in 2018, and it has continued to progress and deliver as per the plan. The Company has increased its product and development headcount to 661, and the speed and the delivery of the product are improving. EMIS Group has so far completed ten projects for NHS Digital and GP IT Futures EMIS Web, six projects each for digital and pharmacy, and four projects for EMIS-X.

EMIS Group highlighted that it has significant cash resources and bank facilities to scale its operations through acquisitions. It will focus on growing revenue and margin in the mid-term. The Company expects cash tax to revert in H2 FY20 and VAT payment holiday is expected to reverse in H1 21. The balance sheet of the Company remains debt-free.

(Source: Company website)

Considering the strong recurring revenue, decent trading performance, sustainable business growth rate trajectory, robust business model, solid balance sheet, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on EMIS Group at the current market price of GBX 977.00 (as on 19 November 2020, before the market close at 9:10 AM GMT) with lower double-digit upside potential based on 24.22x Price/NTM Earnings (approx.) on FY20E 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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