FY16 in line despite NHS challenges

EMIS Group 27 January 2017 Update

EMIS Group

FY16 in line despite NHS challenges

Trading update

Software & comp services

27 January 2017

Price

833.5p

Market cap

£528m

Net debt (£m) at end FY16

0.4

Shares in issue

63.3m

Free float

98%

Code

EMIS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(11.2)

(2.7)

(15.0)

Rel (local)

(12.4)

(5.5)

(28.9)

52-week high/low

1080.0p

807.0p

Business description

EMIS is a clinical software supplier to the primary care market in the UK (supplying over 50% of UK GP practices), a software supplier to UK pharmacies, and through several acquisitions also supplies specialist and acute care software.

Next events

FY16 results

16 March 2017

Analyst

Katherine Thompson

+44 (0)20 3077 5730

EMIS Group is a research client of Edison Investment Research Limited

EMIS has confirmed that trading was in line with expectations for FY16, despite a challenging environment in the NHS. Primary Care, Community Pharmacy and Patient all performed well in H216, offset by weaker trading for Secondary Care, Specialist Care and CCMH. We make no changes to our forecasts pending FY16 results in March. Despite the short-term impact on demand from NHS funding issues, we expect the need for an integrated approach to healthcare to drive demand for EMIS solutions in the longer term.

Year
end

Revenue (£m)

EBITDA*
(£m)

EPS*
(p)

EMIS adj. EPS** (p)

P/E
(x)

Yield
(%)

12/14

137.6

47.6

42.8

39.4

19.5

2.2

12/15

155.9

52.0

46.0

45.1

18.1

2.5

12/16e

162.5

54.1

48.6

47.4

17.2

2.8

12/17e

172.2

57.2

51.9

50.8

16.1

2.9

Note: *EBITDA 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.

FY16 in line with expectations, despite headwinds

EMIS expects to report FY16 results in line with expectations. While Primary Care has maintained its market position and Community Pharmacy trading was on track, NHS funding pressures have made for challenging trading in the Secondary Care (SC) business and to a lesser extent in Community, Child and Mental Health (CCMH). Despite this, CCMH grew market share in H216 and we assume it met its 15% year-end target. Recent restructuring in SC should mitigate the impact on profitability. Specialist Care remains challenging and a non-cash impairment charge is being considered; processes have been put in place to improve profitability over the life of existing contracts.

Restructuring to reflect changing NHS focus

EMIS has decided to bring the Primary, Secondary and CCMH businesses under common management, mirroring the way the NHS is likely to procure in the future; exceptional restructuring costs will be incurred in FY17. In H216 a new CEO was hired for Patient, and we expect to hear more on plans for this business at results on 16 March. With the acquisition of Intrelate, a mobile social care software provider, EMIS made its first (small) foray into the social care space. As pressure grows for the government to integrate health and social care, this gives the company the chance to explore ways to address this market.

Valuation: Clarity on FY17 outlook key

We make no change to forecasts at this point, pending results in March when we should get more clarity on restructuring and future investment plans. On an FY17e P/E of 16.1x after the reaction to the trading update, the stock is trading at a c 20% discount to its peer group. Evidence of improvement in the Secondary and Specialist Care businesses will be key to share price upside in the shorter term. We believe the NHS’s digital agenda continues to support long-term growth for EMIS. Strong cash generation underpins the c 3% dividend yield.

Exhibit 1: Financial summary

£'000s

2012

2013

2014

2015

2016e

2017e

Year end 31 December

PROFIT & LOSS

Revenue

 

 

86,333

105,542

137,639

155,898

162,513

172,178

Cost of Sales

(10,891)

(11,780)

(12,782)

(12,955)

(15,114)

(16,977)

Gross Profit

75,442

93,762

124,857

142,943

147,400

155,201

EBITDA

 

 

33,178

38,885

47,645

51,964

54,057

57,193

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

27,619

30,482

34,787

37,123

39,660

42,196

Amortisation of acquired intangibles

(2,983)

(4,198)

(6,269)

(6,509)

(6,697)

(6,697)

Exceptionals

(435)

(1,144)

873

(18,500)

(652)

0

Share-based payments

(90)

(195)

(270)

(684)

(1,000)

(1,000)

Operating Profit

24,111

24,945

29,121

11,430

31,311

34,499

Net Interest

(76)

(242)

(543)

(449)

(400)

(150)

Profit Before Tax (norm)

 

 

27,567

30,172

34,206

36,625

39,610

42,396

Profit Before Tax (FRS 3)

 

 

24,059

24,635

28,540

10,932

31,261

34,699

Tax

(4,625)

(4,706)

(5,719)

(5,558)

(6,408)

(7,113)

Profit After Tax (norm)

23,191

25,179

27,617

29,801

31,490

33,705

Profit After Tax (FRS3)

19,434

19,929

22,821

5,374

24,852

27,586

Average Number of Shares Outstanding (m)

58.2

59.4

62.8

62.7

62.8

62.8

EPS - normalised & diluted (p)

 

 

39.0

41.4

42.8

46.0

48.6

51.9

EPS - EMIS adjusted (p)

 

 

30.7

34.0

39.4

45.1

47.4

50.8

EPS - FRS 3 (p)

 

 

32.5

32.6

35.3

7.2

38.2

42.3

Dividend (p)

14.2

16.0

18.4

21.2

23.4

24.4

Gross Margin (%)

87.4%

88.8%

90.7%

91.7%

90.7%

90.1%

EBITDA Margin (%)

38.4%

36.8%

34.6%

33.3%

33.3%

33.2%

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

32.0%

28.9%

25.3%

23.8%

24.4%

24.5%

BALANCE SHEET

Fixed Assets

 

 

77,673

153,838

166,415

143,546

134,452

126,258

Intangible Assets

52,789

126,468

139,397

121,383

113,489

105,595

Tangible Assets

22,144

24,610

24,313

22,032

20,832

20,532

Other fixed assets

2,740

2,760

2,705

131

131

131

Current Assets

 

 

27,538

27,046

37,221

39,800

47,466

68,212

Stocks

1,243

1,431

1,550

1,206

1,206

1,206

Debtors

15,188

21,448

28,732

33,893

36,305

39,181

Cash

11,107

4,167

6,939

4,701

9,955

27,825

Current Liabilities

 

 

(30,598)

(54,530)

(67,665)

(63,819)

(53,819)

(55,244)

Creditors

(30,202)

(46,628)

(54,763)

(51,960)

(43,960)

(46,385)

Short term borrowings

(396)

(7,902)

(12,902)

(11,859)

(9,859)

(8,859)

Long Term Liabilities

 

 

(10,548)

(22,231)

(21,063)

(12,481)

(10,681)

(10,681)

Long term borrowings

(3,000)

(9,756)

(5,854)

(1,951)

(151)

(151)

Other long term liabilities

(7,548)

(12,475)

(15,209)

(10,530)

(10,530)

(10,530)

Net Assets

 

 

64,065

104,123

114,908

107,046

117,418

128,545

CASH FLOW

Operating Cash Flow

 

 

32,732

38,725

44,856

42,711

44,493

56,742

Net Interest

(60)

(580)

(445)

(422)

(300)

(50)

Tax

(4,566)

(5,073)

(5,247)

(6,896)

(8,120)

(8,691)

Capex

(18,342)

(15,025)

(15,161)

(14,058)

(12,000)

(13,500)

Acquisitions/disposals

(512)

(57,315)

(9,959)

(4,587)

(1,500)

0

Financing

(1,816)

27,212

(1,578)

492

600

(500)

Dividends

(7,735)

(9,146)

(10,792)

(14,532)

(14,118)

(15,131)

Net Cash Flow

(299)

(21,202)

1,674

2,708

9,054

18,869

Opening net debt/(cash)

 

 

(8,026)

(7,711)

13,491

11,817

9,109

55

HP finance leases initiated

0

0

0

0

0

0

Other

(16)

0

0

0

0

0

Closing net debt/(cash)

 

 

(7,711)

13,491

11,817

9,109

55

(18,815)

Source: EMIS, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2017. “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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2017. “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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

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