EMIS Group |
Disposal of non-core eye-screening business |
Disposal of business |
Software & comp services |
3 April 2019 |
Share price performance
Business description
Next events
Analyst
EMIS Group is a research client of Edison Investment Research Limited |
The disposal of the Specialist & Care business for up to £14.9m removes a non-core, low-margin business from the group and provides funds that can be directed towards the recently unveiled technology roadmap. This results in cuts to our EPS forecasts of c 4% per annum, while operating margins are around two percentage points higher in FY20e and FY21e.
Year end |
Revenue (£m) |
PBT* |
Diluted EPS* |
EMIS adj. dil. EPS** (p) |
DPS |
P/E |
12/17 |
160.4 |
35.2 |
43.1 |
47.0 |
25.8 |
25.1 |
12/18 |
170.1 |
35.1 |
42.7 |
47.3 |
28.4 |
25.4 |
12/19e |
162.8 |
40.9 |
52.5 |
49.5 |
30.0 |
20.6 |
12/20e |
165.1 |
44.3 |
56.8 |
54.0 |
32.0 |
19.1 |
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.
Disposal of Specialist & Care business
EMIS has sold its Specialist & Care business to Northgate Public Services (UK) for an initial cash consideration of £14m and a contingent consideration of £0.9m. The £14m cash received includes £5m intercompany debt recently settled by EMIS, so will have a positive net cash impact of £9m. Specialist & Care provided eye screening services and software and was formed out of two businesses acquired in 2013/2014 for a total enterprise value of £12.5m. At the end of FY18, the business had net assets of £8.0m. EMIS had previously confirmed that this business was not core and the disposal will allow management to focus on the main elements of the growth plan unveiled at last year’s capital markets day.
Moving closer to 30% operating margin target
We have revised our forecasts to reflect the disposal. This reduces revenue forecasts by 8.9% in FY19, 11.8% in FY20 and 11.7% in FY21. Adjusted operating profit and adjusted EPS fall by 3.4%, 4.4% and 4.6% respectively. As divisional adjusted operating margins were significantly below the group average (6.7–8.3% versus 22.4–24.4%), this results in adjusted group operating margins rising to 23.7%, 25.5% and 26.4%, respectively.
Valuation: Discount narrowing
The share price has reacted positively to strong FY18 results and confirmation that the NHS Digital service issue had been resolved within the budgeted provision, but EMIS continues to trade at a discount to peers on P/E basis. Uncertainty over the outcome of IT Futures is likely to weigh on the share price in the short term (a decision is expected in the summer); while we think it highly unlikely that EMIS would not be selected for the framework, there is still uncertainty around pricing, technical requirements and the future competitive environment. In the longer term, evidence that the company is making progress towards the targets set at the recent capital markets day will be the key catalyst for share price upside.
Changes to estimates
Exhibit 1: Forecast changes
£000s |
FY19e |
FY19e |
Change |
y-o-y |
FY20e |
FY20e |
Change |
y-o-y |
FY21e |
FY21e |
Change |
y-o-y |
Old |
New |
Old |
New |
Old |
New |
|||||||
Revenues |
178,742 |
162,849 |
-8.9% |
-4.2% |
187,170 |
165,112 |
-11.8% |
1.4% |
195,906 |
172,947 |
-11.7% |
4.7% |
Normalised operating profit |
41,846 |
40,487 |
-3.2% |
16.6% |
45,790 |
43,838 |
-4.3% |
8.3% |
48,482 |
46,271 |
-4.6% |
5.6% |
Normalised operating margin |
23.4% |
24.9% |
1.5% |
24.5% |
26.6% |
2.1% |
24.7% |
26.8% |
2.0% |
|||
Reported operating profit |
33,122 |
32,256 |
-2.6% |
12.2% |
37,305 |
36,010 |
-3.5% |
11.6% |
41,234 |
39,681 |
-3.8% |
10.2% |
EMIS adjusted operating profit |
39,993 |
38,633 |
-3.4% |
2.7% |
44,015 |
42,064 |
-4.4% |
8.9% |
47,852 |
45,648 |
-4.6% |
8.5% |
Adjusted operating margin |
22.4% |
23.7% |
1.3% |
23.5% |
25.5% |
2.0% |
24.4% |
26.4% |
2.0% |
|||
Normalised EPS - p |
54.2 |
52.5 |
-3.2% |
22.9% |
59.3 |
56.8 |
-4.2% |
8.2% |
62.7 |
59.9 |
-4.5% |
5.5% |
Reported EPS - p |
43.2 |
42.0 |
-2.6% |
16.6% |
48.5 |
46.9 |
-3.4% |
11.5% |
53.6 |
51.6 |
-3.7% |
10.1% |
EMIS adjusted EPS - p |
51.3 |
49.5 |
-3.4% |
4.8% |
56.5 |
54.0 |
-4.4% |
8.9% |
61.7 |
58.9 |
-4.6% |
9.2% |
Dividend per share - p |
30.0 |
30.0 |
0.0% |
5.6% |
32.0 |
32.0 |
0.0% |
6.7% |
34.0 |
34.0 |
0.0% |
6.3% |
Net cash/(debt) |
26,628 |
29,852 |
12.1% |
91.1% |
40,205 |
41,183 |
2.4% |
38.0% |
60,154 |
59,199 |
-1.6% |
43.7% |
Source: Edison Investment Research
Exhibit 2: Financial summary
£000s |
2014 |
2015 |
2016 |
2017 |
2018 |
2019e |
2020e |
2021e |
||
Year end 31 December |
||||||||||
PROFIT & LOSS |
||||||||||
Revenue |
|
|
137,639 |
155,898 |
158,712 |
160,354 |
170,070 |
162,849 |
165,112 |
172,947 |
Cost of Sales |
(12,782) |
(12,955) |
(14,151) |
(14,674) |
(14,686) |
(14,722) |
(14,933) |
(15,998) |
||
Gross Profit |
124,857 |
142,943 |
144,561 |
145,680 |
155,384 |
148,127 |
150,180 |
156,950 |
||
EBITDA |
|
|
47,645 |
51,964 |
52,288 |
49,222 |
51,361 |
54,631 |
58,166 |
61,044 |
Operating Profit (before amort. of acq. intang, SBP and except.) |
34,787 |
37,123 |
38,897 |
34,895 |
34,709 |
40,487 |
43,838 |
46,271 |
||
EMIS adjusted operating profit |
|
|
32,639 |
36,553 |
38,753 |
37,406 |
37,608 |
38,633 |
42,064 |
45,648 |
Amortisation of acquired intangibles |
(6,269) |
(6,509) |
(6,639) |
(6,717) |
(6,860) |
(7,231) |
(6,827) |
(5,590) |
||
Exceptionals |
873 |
(18,500) |
(6,714) |
(16,988) |
1,657 |
0 |
0 |
0 |
||
Share-based payments |
(270) |
(684) |
(473) |
(550) |
(766) |
(1,000) |
(1,000) |
(1,000) |
||
Operating Profit |
29,121 |
11,430 |
25,071 |
10,640 |
28,740 |
32,256 |
36,010 |
39,681 |
||
Net Interest |
(543) |
(449) |
(237) |
(299) |
(185) |
(200) |
(200) |
(200) |
||
Profit Before Tax (norm) |
|
|
34,206 |
36,625 |
39,159 |
35,192 |
35,139 |
40,923 |
44,274 |
46,707 |
Profit Before Tax (FRS 3) |
|
|
28,540 |
10,932 |
25,333 |
10,937 |
29,170 |
32,692 |
36,446 |
40,117 |
Tax |
(5,719) |
(5,558) |
(5,208) |
(2,074) |
(5,548) |
(6,211) |
(6,925) |
(7,622) |
||
Profit After Tax (norm) |
27,617 |
29,801 |
32,175 |
27,989 |
27,854 |
33,148 |
35,862 |
37,832 |
||
Profit After Tax (FRS3) |
22,821 |
5,374 |
20,125 |
8,863 |
23,622 |
26,481 |
29,522 |
32,495 |
||
Average number of shares outstanding (m) |
62.8 |
62.7 |
62.8 |
62.9 |
63.0 |
63.0 |
63.0 |
63.0 |
||
EPS - normalised & diluted (p) |
|
|
42.8 |
46.0 |
49.4 |
43.1 |
42.7 |
52.5 |
56.8 |
59.9 |
EPS - EMIS adjusted & diluted (p) |
|
|
39.4 |
45.1 |
49.2 |
47.0 |
47.3 |
49.5 |
54.0 |
58.9 |
EPS - FRS 3 (p) |
|
|
35.3 |
7.2 |
30.4 |
12.8 |
36.1 |
42.0 |
46.9 |
51.6 |
Dividend (p) |
18.4 |
21.2 |
23.4 |
25.8 |
28.4 |
30.0 |
32.0 |
34.0 |
||
Gross Margin (%) |
90.7% |
91.7% |
91.1% |
90.8% |
91.4% |
91.0% |
91.0% |
90.8% |
||
EBITDA Margin (%) |
34.6% |
33.3% |
32.9% |
30.7% |
30.2% |
33.5% |
35.2% |
35.3% |
||
Operating Margin (before GW and except.) (%) |
25.3% |
23.8% |
24.5% |
21.8% |
20.4% |
24.9% |
26.6% |
26.8% |
||
BALANCE SHEET |
||||||||||
Fixed Assets |
|
|
166,415 |
143,546 |
133,292 |
122,979 |
117,920 |
107,381 |
100,562 |
93,835 |
Intangible Assets |
139,397 |
121,383 |
110,953 |
100,844 |
96,807 |
83,532 |
77,077 |
70,714 |
||
Tangible Assets |
24,313 |
22,032 |
22,187 |
22,037 |
21,000 |
23,100 |
22,100 |
21,100 |
||
Other fixed assets |
2,705 |
131 |
152 |
98 |
113 |
749 |
1,385 |
2,021 |
||
Current Assets |
|
|
37,221 |
39,800 |
46,088 |
56,900 |
53,107 |
70,309 |
83,261 |
102,120 |
Stocks |
1,550 |
1,206 |
1,815 |
1,633 |
1,264 |
1,264 |
1,264 |
1,264 |
||
Debtors |
28,732 |
33,893 |
39,970 |
40,148 |
36,223 |
35,693 |
36,189 |
37,906 |
||
Cash |
6,939 |
4,701 |
4,303 |
13,991 |
15,620 |
33,352 |
43,808 |
60,949 |
||
Current Liabilities |
|
|
(67,665) |
(63,819) |
(56,158) |
(65,131) |
(60,169) |
(58,332) |
(59,119) |
(61,045) |
Creditors |
(54,763) |
(51,960) |
(51,425) |
(65,131) |
(60,169) |
(57,457) |
(58,244) |
(60,170) |
||
Short term borrowings |
(12,902) |
(11,859) |
(4,733) |
0 |
0 |
(875) |
(875) |
(875) |
||
Long Term Liabilities |
|
|
(21,063) |
(12,481) |
(9,080) |
(6,734) |
(8,199) |
(8,705) |
(3,655) |
(1,760) |
Long term borrowings |
(5,854) |
(1,951) |
0 |
0 |
0 |
(2,625) |
(1,750) |
(875) |
||
Other long term liabilities |
(15,209) |
(10,530) |
(9,080) |
(6,734) |
(8,199) |
(6,080) |
(1,905) |
(885) |
||
Net Assets |
|
|
114,908 |
107,046 |
114,142 |
108,014 |
102,659 |
110,653 |
121,048 |
133,150 |
CASH FLOW |
||||||||||
Operating Cash Flow |
|
|
44,856 |
42,711 |
43,657 |
48,834 |
49,873 |
52,649 |
58,457 |
62,052 |
Net Interest |
(445) |
(422) |
(324) |
(356) |
(214) |
(200) |
(200) |
(200) |
||
Tax |
(5,247) |
(6,896) |
(7,655) |
(8,139) |
(5,830) |
(7,530) |
(12,300) |
(8,643) |
||
Capex |
(15,161) |
(14,058) |
(12,084) |
(11,342) |
(12,767) |
(13,700) |
(13,700) |
(13,000) |
||
Acquisitions/disposals |
(9,959) |
(4,587) |
(1,790) |
329 |
(9,269) |
5,500 |
(800) |
(800) |
||
Financing |
(1,578) |
492 |
881 |
571 |
906 |
(500) |
(500) |
(500) |
||
Dividends |
(10,792) |
(14,532) |
(14,006) |
(15,476) |
(21,070) |
(18,487) |
(19,626) |
(20,893) |
||
Net Cash Flow |
1,674 |
2,708 |
8,679 |
14,421 |
1,629 |
17,732 |
11,331 |
18,016 |
||
Opening net debt/(cash) |
|
|
13,491 |
11,817 |
9,109 |
430 |
(13,991) |
(15,620) |
(29,852) |
(41,183) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
(3,500) |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
(0) |
||
Closing net debt/(cash) |
|
|
11,817 |
9,109 |
430 |
(13,991) |
(15,620) |
(29,852) |
(41,183) |
(59,199) |
Source: EMIS, Edison Investment Research
|
|