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EMIS has been informed that it has not been selected as a preferred vendor for the NHS Wales Primary Care framework agreement. The 195 GP practices currently using EMIS Web, which generate annual revenues of c £2m at below group average operating margins, will need to transition to a new supplier over the course of FY19 and FY20. We estimate that this could have a less than 0.5% impact on FY19 EPS and less than 1% on an ongoing basis once all practices have transitioned. So soon after the news regarding issues in the customer support process, this is clearly disappointing. However, the financial impact is marginal and confirms that EMIS is focused on profitability when winning or retaining business.
EMIS Group |
Loss of Welsh GP business |
Contract news |
Software & comp services |
30 January 2018 |
Share price performance
Business description
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Analysts
EMIS Group is a research client of Edison Investment Research Limited |
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EMIS has been informed that it has not been selected as a preferred vendor for the NHS Wales Primary Care framework agreement. The 195 GP practices currently using EMIS Web, which generate annual revenues of c £2m at below group average operating margins, will need to transition to a new supplier over the course of FY19 and FY20. We estimate that this could have a less than 0.5% impact on FY19 EPS and less than 1% on an ongoing basis once all practices have transitioned. So soon after the news regarding issues in the customer support process, this is clearly disappointing. However, the financial impact is marginal and confirms that EMIS is focused on profitability when winning or retaining business.
Year end |
Revenue (£m) |
PBT* |
Dil EPS* |
EMIS adj. dil. EPS** (p) |
DPS |
P/E |
Yield |
12/16 |
158.7 |
39.2 |
49.4 |
49.2 |
23.4 |
15.7 |
3.0 |
12/17e |
165.0 |
37.0 |
45.7 |
46.8 |
25.8 |
17.0 |
3.3 |
12/18e |
173.7 |
38.3 |
47.1 |
48.7 |
26.8 |
16.4 |
3.5 |
12/19e |
183.5 |
43.0 |
53.0 |
54.6 |
27.8 |
14.6 |
3.6 |
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.
Not chosen for NHS Wales GP framework agreement
EMIS currently supplies 195 GP practices in Wales, 4% of its total GP estate in the UK. NHS Wales has undertaken a procurement process for its GP software framework agreement and has just announced that it has not selected EMIS to be on this framework. This means that GP practices currently using EMIS software will need to transition to a new supplier over the course of 2019 and 2020. While obviously disappointing news, the company viewed the contract as carrying disproportionate risk for the revenues on offer.
Modest financial impact starting in FY19
The company noted that revenues from Welsh practices currently stand at c £2m per annum, at a profit margin significantly below the group average. Even if all practices transitioned away in 2019, we would still expect a revenue contribution of c £1m in FY19 and, at an operating margin of 15% (our estimate; group margin was 22.1% in H117), this would equate to a reduction in EMIS adjusted EPS of 0.4%. Once fully transitioned away, we estimate net income would be lower by c £240k per annum. We maintain our forecasts pending FY17 results on 14 March.
Valuation: Reflects uncertainty
The stock is trading on a P/E multiple of 16.4x FY18e and 14.6x FY19e normalised EPS. On EMIS-adjusted forecasts, the stock is trading at a P/E of 15.9x FY18e and 14.2x FY19e, which is at a discount to international healthcare software peers and UK software companies. Further clarity that the scale and cost of the customer support issues are contained should provide support to the share price.
Exhibit 1: Financial summary
£'000s |
2014 |
2015 |
2016 |
2017e |
2018e |
2019e |
||
Year end 31 December |
||||||||
PROFIT & LOSS |
||||||||
Revenue |
|
|
137,639 |
155,898 |
158,712 |
164,955 |
173,684 |
183,534 |
Cost of Sales |
(12,782) |
(12,955) |
(14,151) |
(15,440) |
(17,229) |
(18,665) |
||
Gross Profit |
124,857 |
142,943 |
144,561 |
149,515 |
156,455 |
164,868 |
||
EBITDA |
|
|
47,645 |
51,964 |
52,288 |
50,275 |
52,003 |
56,679 |
Operating Profit (before amort. of acq. intang, SBP and except.) |
34,787 |
37,123 |
38,897 |
36,562 |
37,790 |
42,366 |
||
EMIS adjusted operating profit |
|
|
32,639 |
36,553 |
38,753 |
37,275 |
38,795 |
43,377 |
Amortisation of acquired intangibles |
(6,269) |
(6,509) |
(6,639) |
(6,718) |
(6,718) |
(6,718) |
||
Exceptionals |
873 |
(18,500) |
(6,714) |
(14,000) |
0 |
0 |
||
Share-based payments |
(270) |
(684) |
(473) |
(1,000) |
(1,000) |
(1,000) |
||
Operating Profit |
29,121 |
11,430 |
25,071 |
14,844 |
30,072 |
34,648 |
||
Net Interest |
(543) |
(449) |
(237) |
(150) |
(50) |
0 |
||
Profit Before Tax (norm) |
|
|
34,206 |
36,625 |
39,159 |
37,012 |
38,340 |
42,966 |
Profit Before Tax (FRS 3) |
|
|
28,540 |
10,932 |
25,333 |
15,294 |
30,622 |
35,248 |
Tax |
(5,719) |
(5,558) |
(5,208) |
(3,059) |
(6,124) |
(7,050) |
||
Profit After Tax (norm) |
27,617 |
29,801 |
32,175 |
29,610 |
30,672 |
34,373 |
||
Profit After Tax (FRS3) |
22,821 |
5,374 |
20,125 |
12,235 |
24,498 |
28,198 |
||
Average Number of Shares Outstanding (m) |
62.8 |
62.7 |
62.8 |
62.9 |
62.9 |
62.9 |
||
EPS - normalised & diluted (p) |
|
|
42.8 |
46.0 |
49.4 |
45.7 |
47.1 |
53.0 |
EPS - EMIS adjusted & diluted (p) |
|
|
39.4 |
45.1 |
49.2 |
46.8 |
48.7 |
54.6 |
EPS - FRS 3 (p) |
|
|
35.3 |
7.2 |
30.4 |
18.2 |
37.5 |
43.3 |
Dividend (p) |
18.4 |
21.2 |
23.4 |
25.8 |
26.8 |
27.8 |
||
Gross Margin (%) |
90.7% |
91.7% |
91.1% |
90.6% |
90.1% |
89.8% |
||
EBITDA Margin (%) |
34.6% |
33.3% |
32.9% |
30.5% |
29.9% |
30.9% |
||
Operating Margin (before GW and except.) (%) |
25.3% |
23.8% |
24.5% |
22.2% |
21.8% |
23.1% |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
166,415 |
143,546 |
133,292 |
125,361 |
116,930 |
108,399 |
Intangible Assets |
139,397 |
121,383 |
110,953 |
102,122 |
92,991 |
83,860 |
||
Tangible Assets |
24,313 |
22,032 |
22,187 |
23,087 |
23,787 |
24,387 |
||
Other fixed assets |
2,705 |
131 |
152 |
152 |
152 |
152 |
||
Current Assets |
|
|
37,221 |
39,800 |
46,088 |
50,103 |
58,431 |
79,259 |
Stocks |
1,550 |
1,206 |
1,815 |
1,815 |
1,815 |
1,815 |
||
Debtors |
28,732 |
33,893 |
39,970 |
41,126 |
43,302 |
45,758 |
||
Cash |
6,939 |
4,701 |
4,303 |
7,162 |
13,314 |
31,686 |
||
Current Liabilities |
|
|
(67,665) |
(63,819) |
(56,158) |
(50,925) |
(53,518) |
(56,445) |
Creditors |
(54,763) |
(51,960) |
(51,425) |
(50,925) |
(53,518) |
(56,445) |
||
Short term borrowings |
(12,902) |
(11,859) |
(4,733) |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(21,063) |
(12,481) |
(9,080) |
(9,080) |
(9,080) |
(9,080) |
Long term borrowings |
(5,854) |
(1,951) |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
(15,209) |
(10,530) |
(9,080) |
(9,080) |
(9,080) |
(9,080) |
||
Net Assets |
|
|
114,908 |
107,046 |
114,142 |
115,459 |
112,763 |
122,134 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
44,856 |
42,711 |
43,657 |
43,619 |
43,421 |
57,149 |
Net Interest |
(445) |
(422) |
(324) |
(50) |
50 |
100 |
||
Tax |
(5,247) |
(6,896) |
(7,655) |
(7,402) |
(7,668) |
(8,593) |
||
Capex |
(15,161) |
(14,058) |
(12,084) |
(12,500) |
(12,500) |
(12,500) |
||
Acquisitions/disposals |
(9,959) |
(4,587) |
(1,790) |
0 |
0 |
0 |
||
Financing |
(1,578) |
492 |
881 |
(500) |
(500) |
(500) |
||
Dividends |
(10,792) |
(14,532) |
(14,006) |
(15,575) |
(16,651) |
(17,284) |
||
Net Cash Flow |
1,674 |
2,708 |
8,679 |
7,592 |
6,152 |
18,372 |
||
Opening net debt/(cash) |
|
|
13,491 |
11,817 |
9,109 |
430 |
(7,162) |
(13,314) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
11,817 |
9,109 |
430 |
(7,162) |
(13,314) |
(31,686) |
Source: EMIS, Edison Investment Research
|
|
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