EMIS Group PLC (LON: EMIS) – Sound business model and a robust balance sheet position

EMIS Group is an FTSE AIM UK 50 Index listed Company, which provides connected healthcare software and services. Moreover, the Company has two reportable business segments – EMIS Health and EMIS Enterprise. The Company was established in 1987. EMIS is one of the most prominent providers of healthcare software in the United Kingdom. EMIS generates revenue from offering software & software licenses, B2B services in healthcare, and other services. EMIS Health is the provider of integrated care technology to the NHS (“National Health Service”), while EMIS Enterprise is engaged in business-to-business services within the healthcare industry, including medicines management, life science and patient-facing services.

On 06 May 2021, EMIS will have an Annual General Meeting.

(Source: Company website)

Recent Trend of Dividend Payments

EMIS Group will pay a final dividend of 16.0 pence per share on 14 May 2021, with an ex-dividend date of 15 April 2021. It will take the total FY20 dividend to 32.0 pence per share, which is around 3% higher than the 31.2 pence per share paid during FY19.

Growth Prospects and Risk Assessment

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-positioned to facilitate the NHS's ambition for healthcare technology initiatives. Moreover, there are over 10,000 healthcare organisations that depend on EMIS’ clinical systems daily, and 45 out of 191 Clinical Commissioning Groups use EMIS Health. On an optimistic note, the Company had increased the final dividend for the tenth consecutive year during FY20. The Group’s Pinnacle product had facilitated healthcare professionals to deliver Covid-19 vaccinations in around 1,400 vaccination centres. The Company has supported almost 14.9 million vaccinations as of 01 March 2021.

(Source: Company presentation)

The Company would continue to increase investment for the product development catering to the needs of the healthcare sector. It would continue to focus on the vision of making a digitally connected healthcare world.

However, certain potential risks can impact the business, such as emerging risk associated with Covid-19 pandemic as it can lead to unavailability of required staff and restricted access to key sites; changing healthcare structure of NHS; rapid change in technology; incidents of cybercrimes; financial risks related to limited funding, adequacy of capital, changing interest rates, and uncertainties regarding the creditworthiness of customers amid recessionary market conditions.

Industry Outlook Dynamics

According to Grand View Research’s latest report, the market size of the global healthcare personal protective equipment industry was USD 22.96 billion during 2020. Furthermore, the industry is expected to grow at a CAGR of 11.1% from 2020 to 2028. The increasing demand for products due to the global Covid-19 pandemic would fuel the industry in the coming years.

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

Recent Developments

On 26 February 2021: The Company has appointed Jayaprakasa (JP) Rangaswami, as an Independent Non-Executive Director, effective from 1 March 2021.

A Glimpse of Business Segments (FY20)

Financial and Operational Highlights (for the year ended 31 December 2020 (FY20), as on 18 March 2021)

(Source: Company Website)

• In 2020, the Company delivered another year of positive progress, with recurring revenue increased by 4% YoY.
• The Company has maintained its revenues, adjusted operating profit and adjusted operating margin. In contrast, the reported operating profit (+33%) and cash flow from operations (+27%) were increased, compared with the corresponding period of the last year.
• As per the segment, the revenue increased by 7% YoY, and the adjusted operating profit surged by 8% YoY in EMIS Health. However, the EMIS Enterprise division reflected a strong comparative period and a subdued market, with lower revenue and reduced adjusted operating profit.
• Software subscription and support revenues were higher at £99.5 million; interface and connectivity charges revenues were lower at £20.3 million; hardware and related services revenues increased to £17.3 million; perpetual licences, training, consultancy and implementation revenues decreased to £9.0 million; other services revenues were higher at £13.4 million (all figures were compared with the previous year data).
• Adjusted basic and diluted EPS (earnings per share) were 1% lower at 51 pence and 50.4 pence, respectively (against the previous year). Moreover, the statutory basic and diluted EPS increased to 48.1 pence and 47.6 pence, respectively, compared with the previous year.
• The Board has proposed a final dividend per share of 16.0 pence, bringing a total dividend per share of 32.0 pence. The Company increased its 2020 final dividend and also increased dividend for a tenth consecutive year.
• It witnessed a strong debt-free balance sheet with £53 million of net cash as of 31 December 2020 (an increase of around 70% from the previous year).
• EMIS seems to be well-positioned to meet the healthcare sector's evolving requirements currently and in the post-Covid-19 world.
• EMIS expects to return to growth in 2021.
• Current trading was in line with expectations, with a decent pipeline of opportunities and focussed execution from the teams.
• Further, EMIS-X offers a significant potential to efficiently grow the business, leading to higher growth levels in 2022 and beyond.

Financial Ratios (FY2020)

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 25 March 2021, at the time of writing (8:07 AM GMT), EMIS Group’s shares were trading at GBX 1,086.00, down by 0.37% against the previous day closing price. Stock 52-week High and Low were GBX 1,198.00 and GBX 955.00, respectively.

From a technical standpoint, 200-day SMA (GBX 1,063.00), 200-day EMA (GBX 1,074.00) support an upside potential, and 14-day RSI (44.96) is currently in an oversold position. 

In the past ten years, EMIS Group PLC’s stock price has delivered a return of ~211.38% return as compared to ~86.39% return of FTSE AIM UK 50 index, which shows that the stock has outperformed the benchmark index.

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

Business Outlook Scenario

The Company had shown resilient business performance during FY20, underpinned by robust trading performance during the second half of the year. Moreover, EMIS is well-positioned to tackle business challenges faced by the customers illustrated by the leading market shares, innovative technology, and a significant share of 82% in recurring revenue. Furthermore, EMIS-X would provide significant growth opportunities in the NHS and life sciences in the medium term.

Meanwhile, EMIS would adapt to proposed changes in the NHS organisational structure with a flexible business model. The Company had carried the positive momentum built during H2 FY20 into FY21 and with a strong pipeline of growth opportunities. EMIS had anticipated higher capital expenditure for FY21 in comparison to FY20 due to a rise in internal systems investment. It is expected that EMIS would return to modest growth during 2021 and would accelerate the progress on growth targets from 2022. Overall, the Company would focus on revenue and margin growth in the medium term.

Considering the strong recurring revenue, improvement in the second half, growth in EMIS Health, sustainable business growth rate trajectory, robust business model, solid balance sheet, strong cash flows, 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 1,086.00 (as on 25 March 2021 at 8:07 AM GMT) with lower double-digit upside potential based on 25.33x 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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