EMIS Group — Strengthening the core

EMIS reported FY17 revenues that were 2.8% below our forecast; however, it managed to report adjusted operating profit and adjusted EPS marginally above our forecast. FY17 revenues included a £0.9 contribution from Intrelate (acquired in December FY16) – excluding this, organic growth was 0.5%. On a reported operating profit and EPS basis, we note that the exceptional charge taken for the customer support issue was £11.2m, above our £9m forecast. The company closed the year with net cash of £14.0m, ahead of our £7.2m forecast mainly due to lower working capital consumption.

At a divisional level:

The company is focused on strengthening its core business and enhancing its software to ensure it can meet the evolving needs of the NHS, with three near-term projects underway.

Within Primary Care, by far the largest customer is NHS England, with EMIS Web being used by 4,197 English GP practices (82% of the total number of practices it supports in the UK). We estimate that this business generates c 40% of the group’s revenues. The software is available to practices via the GP System of Choice (GPSoC) framework, which is centrally funded by the NHS. The current framework has been extended until the end of 2018 while a new framework, called IT Futures, is developed. EMIS expects the procurement process to start later this year and conclude in H119. This is likely to mean that the current framework will need to be extended further until the new framework is available.

Clearly it is crucial that EMIS is selected as a vendor on the IT Futures framework agreement. The company is currently in communication with NHS Digital to ascertain the technical requirements for the new framework. This is likely to include increased flexibility, interoperability and modularity, in order to support the many emerging care pathways. The move to keep patients out of hospital as far as possible while reducing the pressure on primary care is likely to mean greater use of community care (eg district nurses, specialist clinics, pharmacists) and self-care.

Our forecasts include English practices under the current framework and make no assumptions on the value per practice under IT Futures nor any changes in market share.

To support the IT Futures framework, the company is working on upgrading EMIS Web to ensure it can support all necessary technical requirements. The company has a new CTO in place who is leading this project. Ideally, the new software will evolve with new modules introduced on a regular basis, rather than the “big-bang” approach of upgrading the software in one go.

Management continues to work towards resolution of the customer support issue that was discovered in January.1 The company has reviewed working procedures across the group and is confident that no such issue exists in any other parts of the group. It has reviewed the Primary Care support function and the historic reports to NHS Digital. As a result, it estimates that the problem arose when the current GPSoC framework was implemented in 2014. The company will now need to resolve the backlog of reported software issues as well as pay penalties to NHS Digital for not meeting the relevant SLAs. Management had initially estimated this cost at high single-digit millions (we had factored in a charge of £9m) but, on further examination, has now taken a charge of £11.2m. In addition, management has decided to strengthen the support and development functions to ensure better customer support and software maintenance, and expects this to add an incremental £3m to the cost base in FY18 and £2m in FY19. We had previously added £2m to our cost base for FY18 and FY19 for this reason, so this implies an additional cost of £1m in FY18. NHS Digital is currently validating the company’s findings and in due course will decide on the level of penalties that EMIS must pay.

The Primary Care business grew its market share by 1% to 56%. We note that this is likely to reduce from FY19 as the 195 Welsh practices moves away (see Loss of Welsh GP business – January 2018). Assuming market share remains at FY17 levels in England, Scotland and Northern Ireland, we forecast a UK market share of 53.9% by the end of FY20, which would still represent market leadership. The company is involved in the Scottish procurement, where it currently supports 519 practices with a legacy version of EMIS software (ie pre-EMIS Web). The current contract is of a similar size to Wales (c £2m) – if selected there is scope for EMIS to earn more than this, but it will depend on the final decision on the software specification.

The business was recently accredited by NHS Digital to deliver its Electronic Prescription Service (EPS) to dispensing doctors. EMIS Health will be able to offer this service to existing customers and could also target other practices that are not currently using EMIS Web.

EMIS Health continues to grow the network of partners that use EMIS Web, and has just added its 101st partner.

Egton deployed Wi-Fi at more than 1,000 practices during 2017. It has developed a digitisation service (in pilot), where paper documents are scanned, helping surgeries to become paperless.

The Community Care business grew market share by 1% to 17% and has moved into a number two market position, behind TPP. The company expects further growth from this business in FY18 with the ultimate target of moving into the number one position.

The Acute business saw a better performance in H2 than H1, with revenues up h-o-h and costs down over the same period. The division is focused on its best-of-breed software solutions for A&E and hospital pharmacy – in both areas it holds the number two position and gained share in both areas during the year. The EU will be rolling out the final phase of the Falsified Medicines Directive (FMD) in February 2019, which will require medicines to be tracked from manufacturer to patient. The Acute business is investing in its hospital pharmacy software to ensure it meets the requirements of FMD. It has also rolled-out a Child Protection module for the Symphony A&E product.

The CP business maintained its market share at 37%, which makes it joint market leader alongside Cegedim. The roll-out of the upgraded ProScript Connect software to direct customers is well underway and should be complete by the end of 2018. The Celesio roll-out to the AAH Pharmaceuticals independent estate is also underway and should be substantially complete by the end of 2018. The roll-out to the Lloyds estate (which will take market share close to 50%) has been delayed, while the customer completes another major IT project.

The business is keen to grow the use of EMIS Web by pharmacies, particularly to support Patient Group Directions – these are delegated small procedures such as flu jabs or travel vaccinations. This would enable pharmacists to look up patient information before carrying out procedures, as well as recording them in EMIS Web so that GPs are aware of treatment given to patients outside the surgery.

EMIS Health Specialist marginally reduced its market share from 77% to 76% over the year. The government had previously procured another software provider for its national screening programme, but this procurement appears to have been postponed. This should mean it is business as usual for the Specialist business for the time being.

EMIS Care increased its share of the outsourced diabetic eye screening market to 26%, from 18% a year ago. Several multi-year contracts that were won in 2016 were fully implemented in 2017.

The business has completed the update of its patient.info website – it is now mobile responsive and can support multiple content formats, including short-form video content. Monthly active users averaged 15 million through 2017. The business has also completed development of the Patient Access 2.0 app – this is waiting for final approval from NHS Digital before expected launch in H218. The business will continue to invest in building its digital healthcare marketplace through the course of FY18.

We have revised our forecasts to reflect the following:

EMIS is trading at a discount to its peer group on all multiples and is forecast to generate a dividend yield at the top end of the range. It is at the top end of the peer group in terms of profitability. However, it is at the bottom of the range in terms of revenue growth and, with the costs of remedying the customer support issue factored in, it is forecast to see a small decline in adjusted earnings in FY18 before returning to growth in FY19. In our view, evidence that earnings are returning to growth will be key to closing this discount. Management’s growth plans, due later this year, should outline how the company expects to grow revenues in the longer term.