EMIS Group — Maintaining profitability

EMIS reported 0.7% year-on-year revenue growth in H117. Excluding the £0.5m contributed by the acquisition of Intrelate (December 2016), revenues were flat year-on-year. Recurring revenues grew 4% to make up 84% of revenues. Adjusted operating profit was marginally lower y-o-y due to increased investment in the Patient business. Excluding the additional investment, adjusted operating profit was 4% higher y-o-y. The tax rate of 19.2% was close to the statutory rate for the period. Overall, this resulted in flat adjusted net income y-o-y. Normalised operating profit and net income reduced year-on-year, reflecting the increase in amortisation of capitalised development costs (H116 £3.0m, H117 £3.3m) at the same time as a decrease in capitalised development costs (H116 £2.9m, H117 £2.1m). The company had previously flagged its reorganisation programme – this incurred exceptional costs of £2.5m in H117.

The company closed the period with cash of £10.5m and no debt. The company also secured a new revolving credit facility with Barclays and Lloyds at a reduced cost. The initial facility is for £30m over three years with an accordion arrangement to increase it to £60m with options to extend to a maximum of five years.

An interim dividend of 12.9p (+10% y-o-y) was announced, higher than our forecast of 12.2p. The company expects to match this for the final dividend, making a full year dividend of 25.8p compared to our previous forecast of 24.4p.

EMIS reported divisional results according to the new company structure for the first time (Exhibit 2). The Primary, Community & Acute Care (PCA) division reported a 3% revenue decline, as the Acute business continued to suffer from NHS funding pressures. In addition, discretionary spending in Primary Care came under pressure and hosting revenues declined. Despite this, the company managed to improve profitability, with PCA adjusted operating profit 5% higher and the adjusted operating margin expanding from 25.4% to 27.5%.

Community Pharmacy achieved a solid performance, with 5% revenue growth resulting in 16% growth in adjusted operating profit.

Specialist & Care saw 19% revenue growth as several screening contracts won in 2016 were implemented. This brought with it additional costs, resulting in a small adjusted operating loss.

The Patient division has been split out for the first time. The increase in revenues was more than offset by the increase in investment to build the business, resulting in a loss of £0.33m on revenues of £1.45m.

The business has been restructured to bring the Acute business under the same leadership as Primary Care and Child, Community & Mental Health (CCMH). The majority of the reorganisation was completed in H117; in H2 the company will focus on putting in place the right processes to improve accountability.

In Primary Care, the company achieved a small increase in market share from 55% to 56%. The roll-out of EMIS Web in Northern Ireland is underway, with 23 practices live at the end of H1. More than a quarter of CCGs use EMIS Web exclusively in all GP practices in their area (from 51 to 57 CCGs over the course of H1). The company noted that discretionary spending available under the GP System of Choice framework (GPSoC) was tightened up from 1 January 2017, which had a negative effect on revenues in H1.

With two new contracts won in H1, CCMH increased market share from 16% to 18% and is on the way to meeting its 20% target for the end of FY17.

The Acute business continued to feel the pressure from NHS budget constraints. Revenues declined 14% y-o-y, mainly due to a lower level of non-recurring implementation work. The business won several smaller contracts for hospital pharmacy systems, bed management and emergency care. The division continues to work with the University Hospital Southampton on its global digital exemplar project.

Community Pharmacy maintained its market share of 37%, with a small increase in the total estate from 5,091 to 5,120. The roll-out of ProScript Connect to Celesio’s independent estate is about to start, to be followed by roll-out to the Lloyds Pharmacies’ estate, which should take the company’s market share to c 50% once complete (target FY19). 284 existing customers had been upgraded to ProScript Connect by the end of H117.

Pharmacies have not been immune from the budgetary pressures affecting the NHS – the government has reduced by 7% the fees earned by pharmacies for issuing prescriptions. EMIS believes its software can help pharmacies to offer additional services (eg flu jab, monitoring services) to patients to generate alternative revenue streams.

The Care eye-screening business took its market share from 18% to 26% over the period as it implemented five contracts it won in 2016. These contracts incurred start-up costs in the form of additional staff and extra equipment to support the service. The company expects that profitability should improve over the life of the contracts. The company had previously announced that it had given 12 months’ notice on a loss-making contract. This should have a positive impact on profitability from H218.

The company had previously noted that the Specialist software business was bidding for Public Health England’s national screening platform; it has just announced that it was not selected. As the new contract is implemented, this is likely to reduce EMIS’ market share. However, management does not expect the new national screening platform to be live soon, as it understands that the winning bidder does not yet have working software.

A management team is now in place and the new website was launched in August. Further development is underway to enable fully responsive, multi-device functionality for Patient.info and Patient Access by the end of 2017. During 2018, the focus will be on completing the e-commerce platform. The company expects to be able to deliver the development work more cheaply than originally planned, as it expects to be able to use its in-house development team in Chennai rather than third-party providers for more of the work than originally expected. Rather than reducing the absolute amount invested in Patient, it is likely to result in faster delivery of projects.

Andy Thorburn, the recently appointed CEO, outlined his views on the strategic direction of the company. He believes that EMIS should aim to have a number one or strong number two position in each business area in which it operates. Some parts of the company (CCMH, Acute, EMIS Care) are not currently in this position, and the challenge now is to decide whether to focus investment on these areas to grow share organically or via acquisition, to enter into partnerships, or whether to exit from certain business areas.

The company has guided to FY17 revenues of c £165m with adjusted operating profit in the region of £37m. We have revised our forecasts to reflect the new divisional reporting structure as well as H1 results. We have increased exceptional costs by £1m in FY17 to £5m (the company guided to a total cost of £4-6m for the reorganisation programme). Despite slightly lower revenue forecasts in FY17 and FY18, we assume that the reorganisation programme will enable the company to maintain profitability.

On earnings multiples, EMIS trades at a discount to both the mean and median of its peer group, despite forecasts for it to achieve margins at the top end of the peer group. We believe this is due to the combination of lower than average revenue growth leading to lower earnings growth. With recurring revenues at 84% and a strong balance sheet, we expect the company to be able to maintain its above average dividend yield.