Robust H2, prospects look good
Allocate Software Plc (LONDON:ALLA) full year trading update confirms that revenues were in line with expectations, while EBITDA and cash generation were ahead, with strong uptake of Allocate cloud boosting both cash generation and recurring revenues. With HealthRoster’s market position in the NHS looking rock-solid and SafeCare offering a promising source of incremental revenue streams, prospects for 2015 look good. We do not believe these prospects are reflected in the company’s rating of 14.3x FY15 P/E ratio.
Cloud and HealthRoster support a robust H2
Robust demand for HealthRoster and better than anticipated uptake of Allocate Cloud again delivered the strong H2 to meet our FY sales estimate. Revenues in the core healthcare operations grew by an estimated 18% y-o-y (all organic) offset by declines in the lumpy maritime and defence businesses. Demand for HealthRoster was supported by a combination of wins in greenfield sites, competitive displacements and the favourable licensing renewal cycle, with the renewal rate maintained at 100%. Uptake of Allocate Cloud continues to exceed expectations, improving the recurring revenue mix and contributing to the company’s strong cash performance. This progress was offset by slower progress with the medics products, while Patient Flow is yet to make further headway.
SafeCare and HealthRoster V10 support prospects
Scope for cross-selling should be enhanced by good progress in migrating NHS trusts to HealthRoster V10, which interfaces with Allocate’s new generation of in-house developed products (33% of trusts now live). 15% of Allocate’s NHS customers have contracted to use the first product of the company’s SafeCare suite, developed to support the drive to improve the transparency of NHS staffing levels. In SafeCare, we feel Allocate now has an in-house developed product with clear potential to generate a significant incremental revenue stream, building on the platform established in the NHS through HealthRoster.
Valuation: Does not reflect potential
We have nudged up our FY14 EBITDA and EPS by 4%, with year-end net cash moving up by 10% to £13m. We are leaving our FY15 P&L estimates unchanged, but believe that both years of forecasts are conservative. The FY15e P/E of 14.3x (a c 15% discount to European healthcare software peers) does not seem to factor in the strength of the company’s position in the NHS, scope for cross-selling driven growth, cash generation and balance sheet strength (net cash is close to 20% of the market capitalisation).
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