Acquiring blockchain expertise

EMIS Group 6 November 2018 Update
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EMIS Group

Acquiring blockchain expertise

Acquisitions

Software & comp services

6 November 2018

Price

909p

Market cap

£576m

Net cash (£m) at end H118

32.3

Shares in issue

63.3m

Free float

98%

Code

EMIS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(9.6)

(0.1)

(4.5)

Rel (local)

(6.7)

7.7

1.8

52-week high/low

1,050p

705p

Business description

EMIS is a clinical software supplier to the primary, community and acute care markets in the UK, as well as providing software to the community pharmacy and specialist ophthalmology markets. Its Patient business provides medical and well-being information as well as transactional services to patients.

Next events

Capital Markets Day

29 November 2018

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Dan Ridsdale

+44 (0)20 3077 5729

EMIS Group is a research client of Edison Investment Research Limited

EMIS has announced two investments: the acquisition of the remaining 21.1% minority interest in Rx Systems and the acquisition of Dovetail Digital, a healthcare blockchain technology start-up. This gives EMIS full control of the community pharmacy business and a head start in the use of blockchain to provide secure access to patient data. These investments have consumed c £9.5m in cash. The net effect of these acquisitions is an increase in our normalised EPS forecasts of 0.6% in FY18 and 2.4% in FY19 and FY20.

Year end

Revenue (£m)

PBT*
(£m)

Dil EPS*
(p)

EMIS adj. dil. EPS** (p)

DPS
(p)

P/E
(x)

12/17

160.4

35.2

43.1

47.0

25.8

21.1

12/18e

170.4

36.9

45.4

47.0

28.4

20.0

12/19e

176.8

39.3

49.8

49.5

29.8

18.2

12/20e

184.1

42.5

54.5

54.6

31.4

16.7

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **EMIS adjusted EPS – cash accounts for development costs, and excludes exceptional items and amortisation of acquired intangibles.

Acquiring remaining 21.1% of Rx Systems

Having acquired 78.9% of Rx Systems in 2010, EMIS has just acquired the remaining 21.1% from Phoenix Medical Supplies for £8m in cash. This gives EMIS full control of the community pharmacy business. Phoenix owns the 500+-strong Rowlands Pharmacy chain and we expect the chain will continue to use EMIS software. Rx paid a £19m dividend just prior to this, and we have reflected the £4m outflow to minority shareholders.

Exploring the use of blockchain for healthcare

EMIS has acquired Dovetail Digital for £2.5m in initial consideration (£1.5m cash paid and £1m equity to be issued subject to hitting milestones) and up to £2.5m contingent consideration. Dovetail has designed blockchain-based software that gives patients full control of their healthcare records, delivering secure exchange of data between different health services and new digital technologies involved in patient care. The software is currently being trialled by the NHS. We have reflected minimal revenues and a cost base of c £1m per annum. We expect to learn more about how this technology will fit into the wider roadmap when the company presents its growth plans at its Capital Markets Day on 29 November.

Valuation: Growth strategy key to upside

EMIS is trading on 20.0x FY18e EPS and 18.2x FY19e EPS, at a 26% and 22% discount respectively to its peer group average. Although EMIS is more profitable than its peers, it lags in terms of revenue and earnings growth. Evidence of an acceleration of earnings growth will be key to share price upside – in the shorter term, this could include positive news on the English primary care procurement and, in the longer term, evidence that the investment in Patient is paying off as well as more information on the growth strategy. Strong cash generation underpins the 3% dividend yield.

Changes to estimates

Exhibit 1: Forecast changes

£000s

FY18e

FY19e

FY20e

Old

New

Change

y-o-y

Old

New

Change

y-o-y

Old

New

Change

y-o-y

Revenues

170,420

170,420

0.0%

6.3%

176,280

176,780

0.3%

3.7%

183,644

184,144

0.3%

4.2%

Normalised operating profit

36,360

36,360

0.0%

4.2%

39,429

38,999

-1.1%

7.3%

42,630

42,180

-1.1%

8.2%

Reported operating profit

28,642

28,642

0.0%

169.2%

31,711

31,281

-1.4%

9.2%

35,151

34,701

-1.3%

10.9%

EMIS adjusted operating profit

37,336

37,336

0.0%

-0.2%

39,257

38,797

-1.2%

3.9%

42,689

42,207

-1.1%

8.8%

Normalised EPS (p)

45.2

45.4

0.6%

5.5%

48.7

49.8

2.4%

9.6%

53.2

54.5

2.4%

9.4%

Reported EPS (p)

35.9

36.2

0.8%

182.8%

39.0

40.2

3.0%

11.0%

43.8

45.1

2.9%

12.2%

EMIS adjusted EPS (p)

46.7

47.0

0.6%

-0.1%

48.4

49.5

2.3%

5.3%

53.3

54.6

2.3%

10.2%

Net cash/(debt)

17,796

4,196

-76.4%

-70.0%

24,693

10,686

-56.7%

154.7%

37,838

23,454

-38.0%

119.5%

Source: Edison Investment Research


Exhibit 2: Financial summary

£'000s

2014

2015

2016

2017

2018e

2019e

2020e

Year end 31 December

PROFIT & LOSS

Revenue

 

 

137,639

155,898

158,712

160,354

170,420

176,780

184,144

Cost of Sales

(12,782)

(12,955)

(14,151)

(14,674)

(15,934)

(16,847)

(17,807)

Gross Profit

124,857

142,943

144,561

145,680

154,486

159,933

166,337

EBITDA

 

 

47,645

51,964

52,288

49,222

50,722

53,751

57,268

Operating Profit (before amort. of acq. intang, SBP and except.)

34,787

37,123

38,897

34,895

36,360

38,999

42,180

EMIS adjusted operating profit

 

 

32,639

36,553

38,753

37,406

37,336

38,797

42,207

Amortisation of acquired intangibles

(6,269)

(6,509)

(6,639)

(6,717)

(6,718)

(6,718)

(6,479)

Exceptionals

873

(18,500)

(6,714)

(16,988)

0

0

0

Share-based payments

(270)

(684)

(473)

(550)

(1,000)

(1,000)

(1,000)

Operating Profit

29,121

11,430

25,071

10,640

28,642

31,281

34,701

Net Interest

(543)

(449)

(237)

(299)

(50)

(300)

(300)

Profit Before Tax (norm)

 

 

34,206

36,625

39,159

35,192

36,946

39,335

42,516

Profit Before Tax (FRS 3)

 

 

28,540

10,932

25,333

10,937

29,228

31,617

35,037

Tax

(5,719)

(5,558)

(5,208)

(2,074)

(5,583)

(6,323)

(6,657)

Profit After Tax (norm)

27,617

29,801

32,175

27,989

29,557

31,468

34,438

Profit After Tax (FRS3)

22,821

5,374

20,125

8,863

23,645

25,294

28,380

Average Number of Shares Outstanding (m)

62.8

62.7

62.8

62.9

63.0

63.0

63.0

EPS - normalised & diluted (p)

 

 

42.8

46.0

49.4

43.1

45.4

49.8

54.5

EPS - EMIS adjusted & diluted (p)

 

 

39.4

45.1

49.2

47.0

47.0

49.5

54.6

EPS - FRS 3 (p)

 

 

35.3

7.2

30.4

12.8

36.2

40.2

45.1

Dividend (p)

18.4

21.2

23.4

25.8

28.4

29.8

31.4

Gross Margin (%)

90.7%

91.7%

91.1%

90.8%

90.7%

90.5%

90.3%

EBITDA Margin (%)

34.6%

33.3%

32.9%

30.7%

29.8%

30.4%

31.1%

Operating Margin (before GW and except.) (%)

25.3%

23.8%

24.5%

21.8%

21.3%

22.1%

22.9%

BALANCE SHEET

Fixed Assets

 

 

166,415

143,546

133,292

122,979

118,035

117,201

109,270

Intangible Assets

139,397

121,383

110,953

100,844

94,264

86,344

78,427

Tangible Assets

24,313

22,032

22,187

22,037

23,037

29,487

28,837

Other fixed assets

2,705

131

152

98

734

1,370

2,006

Current Assets

 

 

37,221

39,800

46,088

56,900

48,317

64,393

78,997

Stocks

1,550

1,206

1,815

1,633

1,633

1,633

1,633

Debtors

28,732

33,893

39,970

40,148

42,488

44,074

45,910

Cash

6,939

4,701

4,303

13,991

4,196

18,686

29,454

Current Liabilities

 

 

(67,665)

(63,819)

(56,158)

(65,131)

(58,329)

(62,506)

(65,026)

Creditors

(54,763)

(51,960)

(51,425)

(65,131)

(58,329)

(60,506)

(63,026)

Short term borrowings

(12,902)

(11,859)

(4,733)

0

0

(2,000)

(2,000)

Long Term Liabilities

 

 

(21,063)

(12,481)

(9,080)

(6,734)

(5,020)

(9,716)

(4,361)

Long term borrowings

(5,854)

(1,951)

0

0

0

(6,000)

(4,000)

Other long term liabilities

(15,209)

(10,530)

(9,080)

(6,734)

(5,020)

(3,716)

(361)

Net Assets

 

 

114,908

107,046

114,142

108,014

103,002

109,372

118,879

CASH FLOW

Operating Cash Flow

 

 

44,856

42,711

43,657

48,834

40,580

54,342

57,952

Net Interest

(445)

(422)

(324)

(356)

27

(223)

(300)

Tax

(5,247)

(6,896)

(7,655)

(8,139)

(6,168)

(7,628)

(12,012)

Capex

(15,161)

(14,058)

(12,084)

(11,342)

(13,000)

(13,000)

(13,000)

Acquisitions/disposals

(9,959)

(4,587)

(1,790)

329

(9,500)

0

0

Financing

(1,578)

492

881

571

(577)

(577)

(500)

Dividends

(10,792)

(14,532)

(14,006)

(15,476)

(21,157)

(18,424)

(19,373)

Net Cash Flow

1,674

2,708

8,679

14,421

(9,795)

14,491

12,768

Opening net debt/(cash)

 

 

13,491

11,817

9,109

430

(13,991)

(4,196)

(10,686)

HP finance leases initiated

0

0

0

0

0

(8,000)

0

Other

0

0

0

0

0

0

0

Closing net debt/(cash)

 

 

11,817

9,109

430

(13,991)

(4,196)

(10,686)

(23,454)

Source: EMIS, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by EMIS Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by EMIS Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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