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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.
EMIS Group |
Acquiring blockchain expertise |
Acquisitions |
Software & comp services |
6 November 2018 |
Share price performance
Business description
Next events
Analysts
EMIS Group is a research client of Edison Investment Research Limited |
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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* |
Dil EPS* |
EMIS adj. dil. EPS** (p) |
DPS |
P/E |
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
|
|
MedicX will report its results for the year ended 30 September 2018 in December. H218 included a significant portfolio acquisition and an important restructuring of some long-term debt facilities, increasing the company’s borrowing flexibility and extending its facilities at a lower marginal cost. NAV total return during Q3 was a strong 3.4%, following 8.0% in H118, while the pipeline of identified investment opportunities in the UK and the Republic of Ireland remained strong. The shares offer an attractive prospective yield of 4.8%, with full dividend cover, and currently trade at a small discount to NAV.