EMIS Group PLC (LON: EMIS): Sustainable business model and robust balance sheet position

Established in 1987, EMIS Group is a FTSE AIM UK 50 Index listed Company, which provides connected healthcare software and services. The Company’s brands include EMIS Care, which serves with diabetic retinopathy eye screening; EMIS Health, which deals in clinical software; Patient.info, which is an online health platform; Egton, which caters to social sector with non-clinical products and services. The Company was formed as Egton Medical Information Systems and got listed on the AIM market in 2010. Presently, it is a major provider of healthcare software in the United Kingdom. It supplies intelligent analysis software and offers front line technology that doctors rely on to manage patient care. It generates revenue by offering software and software licences, hosting services, business to business services in healthcare, and other support services.

On 18 March 2021, the Company will release its final results for the year ended 31 December 2020.

(Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

EMIS Group is focused on providing innovative solutions for the NHS and business-to-business healthcare industry, which would drive improvement in better patient outcomes and healthcare efficiency. The Company has a robust and resilient business model with 78% recurring revenue and leading positions in the key healthcare markets. It has a nine-year track record of increasing dividend by 10% year-on-year, which underpins significant growth in revenue and adjusted profits over the years. Presently, the Company has a strong balance sheet with £53 million in net cash and carrying no debt obligation. Moreover, there are over 10,000 healthcare organisations that relies on EMIS’ clinical systems daily, and 45 out of 191 Clinical Commissioning Groups use EMIS Health systems.

Regarding the risk factors, the Company’s performance is subject to various risks and uncertainties. It is exposed to the financial risk associated with liquidity issues, credit risk amid recessionary economic conditions, and the risk of fluctuating interest and exchange rates. The widening demand-supply gap of skilled professionals can have detrimental consequences in 2020 and beyond. The global financial crisis can lead to a limited funding opportunity. Moreover, the Brexit uncertainties can lead to trade barriers, shortage of skilled labour supply, and currency volatility. 

Industry Outlook Dynamics

According to a publication from the Grand View Research, the market size of the global healthcare IT industry is projected to reach US$147.3 billion by 2027 from US$74.2 billion in 2019, representing a CAGR of nearly 10.3%. The market growth is expected to be supported by the growing adoption of healthcare systems, enhancements in network infrastructure, increase in the geriatric and paediatric population and growing smartphone penetration.

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)

Trading Update (for the year ended 31 December 2020, as on 21 January 2021)

• The Company saw an improvement in H2 FY20. The trading for FY20 was slightly ahead of the management's anticipations and maintained its revenue and adjusted operating profit in FY20.
• In EMIS Health, the Company increased its sales in Covid-19 related product.
• During the H2 FY20 period, the trading environment in EMIS Enterprise has gradually improved, with the controlled release of EMIS-X Analytics in Q4 FY20.
• It witnessed a strong balance sheet with £53 million of net cash as at 31 December 2020 (an increase of around 70% from the previous year).
• The Board stays confident in the outlook for the business.

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.
• 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.
• In the community market, EMIS Health retained the number two market position in the first half of 2020.
• 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.

Financial Ratios (H1 FY20)

Share Price Performance Analysis

On 21 January 2021, at the time of writing (before the market close, at 8:00 AM GMT), EMIS Group’s shares were trading at GBX 1,110.00. Stock 52-week High and Low were GBX 1,250.00 and GBX 722.00, respectively.

From the technical standpoint, 100-day EMA (1,050.23), and 100-day SMA (1,045.53) are indicating a bullish setup.

In the past two years, EMIS Group PLC’s stock price has delivered a return of +21.05% return as compared to +28.93% return of FTSE AIM UK 50 index and +1.52% return of FTSE All Share Health Care Equipment & Services index, which shows that the stock has outperformed the benchmark sector but underperformed the benchmark index.

In the last ten years, EMIS Group Plc share price has delivered around 158.65% return as compared to the approximately 84.33% return of FTSE AIM UK 50 index, which shows that the stock has outperformed the index during the last ten years.

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

Business Outlook Scenario

EMIS Group has maintained the market-leading positions in all healthcare markets with a resilient business model. It benefits from strong recurring revenues and is well placed to facilitate the NHS's ambition for healthcare technology initiatives. It has strengthened the EMIS Enterprise with the acquisition of Pinnacle in March 2020 to serve community pharmacy customers better. Moreover, the strong trading in H2 FY20 demonstrates the strength of the business model, while the Group has remained committed to investing in developing a next-generation technology. Therefore, it is well-positioned for growth in the medium term. The progressive transition to EMIS-X-based technology shall provide new opportunities with upgrades to EMIS Web.

(Source: Presentation, Company Website) 

Considering the strong recurring revenue, improvement in the second half, 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 1,110.00 (as on 21 January 2021, before the market close at 8:00 AM GMT) with lower double-digit upside potential based on 25.28x 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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