Emis Group Plc (LON:EMISG) reported growth in revenues (+7%), adjusted operating profit (+8%) and adjusted EPS (+11%) in H119. Management restructured the business during H1 to reflect the two key customer groups for EMIS products and, with the disposal of the Specialist & Care division, streamlined the product portfolio. Development of EMIS-X continues on track, with the first application based on the platform launched within the Patient Access app. We view the share price as likely to tread water until the outcome of the GP IT Futures procurement process is announced in the next few months.
H1 performance strong despite ongoing restructuring
During H1, management restructured the business to reflect the differing needs and market dynamics of its two main customer groups: the NHS and the private sector. Both divisions saw revenue growth year-on-year, although profitability for EMIS Health was slightly lower reflecting increased investment in the EMIS-X platform. Net cash was boosted by proceeds from the Specialist & Care disposal and an interim dividend of 15.6p (+10% y-o-y) was announced.
Outlook unchanged; waiting for IT Futures outcome
Management’s expectations for FY19 are unchanged, with operating profit growth in the mid- to high single digits targeted. We have revised our estimates to reflect H1 results, exceptional costs for restructuring, a higher dividend, and higher product development expenditure in FY20 and FY21. The company has submitted its bid for the IT Futures framework (which will take effect on 1 January 2020) and is now waiting for NHS Digital to review all bids. Management expects the outcome to be announced in the next few months.
Valuation: Trading in line with peers
The share price has gained 23% year to date; while it is down 4% over the last three months, it has still outperformed the FTSE AIM index. The stock is trading broadly in line with peers on a P/E basis and offers a dividend yield at the upper end of the group. We believe that uncertainty over the outcome of GP IT Futures is currently weighing on the share price; while we think it highly unlikely that EMIS would not be selected for the framework, there is still uncertainty around pricing and the future competitive environment. In the longer term, evidence that the company is making progress towards the targets set at last year’s capital markets day will be the key catalyst for share price upside.
Business description
EMIS is a software supplier to the UK healthcare market, with two divisions. EMIS Health supplies integrated care technology to the NHS, including primary, community, acute and social care. EMIS Enterprise is a business-to-business software provider to the healthcare market, including medicines management, partner businesses, patient-facing services and UK healthcare blockchain.
Review of H119 results
As the Specialist & Care business was sold in April, its contribution was reported in discontinued operations; the results above are for continuing operations. Group revenue increased 7.2% year-on-year and EMIS adjusted operating profit was up 8.3% y-o-y. This resulted in a 20bp improvement in the adjusted operating margin. Recurring revenue increased only 1% y-o-y; the company sold several licences on a perpetual basis, particularly for software that it views as legacy, resulting in higher non-recurring revenues in H119. Net interest expense increased as a result of the first-time application of IFRS 16 (lease accounting). At the earnings level, adjusted diluted EPS was 11.4% higher y-o-y. Normalised diluted EPS was 25.4% higher y-o-y, reflecting the combination of higher capitalised development costs and lower amortisation of development costs compared to a year ago.
Net cash before lease liabilities (recognised for the first time in H119) of £26.7m decreased from £32.3m at the end of H118 and increased from £15.6m at the end of FY18. The company generated £25.6m cash from operating activities (after paying £1.2m in exceptional costs), invested £6.7m in capex, received £6.2m net proceeds from the sale of the Specialist & Care division, paid out £9.0m in dividends and bought shares worth £3.6m for the Employee Benefit Trust.
The company announced an interim dividend of 15.6p per share (+10% y-o-y), higher than our 15.0p forecast.
Divisional performance
During H1, the company was restructured with businesses grouped into EMIS Health (businesses generating the majority of revenues from the NHS) or EMIS Enterprise (businesses generating the majority of revenues from the private sector). This resulted in exceptional charges of £2.2m during H119, and we estimate that a further £1m in related one-off costs will be incurred in H219. Total headcount reduced from 2,047 at the end of FY18 to 1,560 at the end of H119, with 366 of the reduction due to the disposal of the Specialist & Care division, and the remaining 121 reduction from the restructuring.
Management has previously spoken of its desire to grow the contribution of the Enterprise division to half of group revenues. In FY18, EMIS Enterprise made up 33.7% of group revenues, increasing to 37.0% in H119.
EMIS Health – NHS focused
This division incorporates Primary and Community Care (excluding primary care business with partners and overseas customers), Egton and the Acute A&E business.
In H119, revenues increased 3.5% y-o-y with adjusted operating profit down 3.6% y-o-y. The business has increased the pace of spend to support the development of the EMIS-X platform, resulting in a dip in adjusted operating margins from 23.0% a year ago to 21.5% in H119.
In Primary Care, market share was maintained at 57% in the UK, with a small net gain in practices in England and Scotland. From this, we assume that there has not yet been a material decline in Welsh practices (we had assumed that share in Wales would halve this year and reach zero by the end of next year). The online triage service that was launched last year has been selected by five clinical commissioning groups (CCGs) covering 900,000 patients. The number of CCGs in which 100% of practices use EMIS Web increased from 63 at the end of FY18 to 67 by the end of H119 (35% of all CCGs in England). All practices in Northern Ireland have been upgraded to EMIS Web and the business is working with NHS Scotland (where it was selected for the NHS National Services Scotland framework earlier this year) to align its solutions with Scotland’s health and care strategy.
The Community business won 69 new contracts in H119 and slightly increased market share from 20% to 21%, maintaining its number two position.
The Acute A&E business won two new contracts for Symphony software in H1 and maintained its market share at 22%, and is now the leader in this market.
GP IT Futures outcome expected in next few months
EMIS submitted its bid for the GP IT Futures framework and is now awaiting the outcome. According to the NHS, 73 bids have been received in total. Management expects that a large number of these bids will be for the digital buying catalogue, which includes a large number of applications that can be used in primary care, with a much smaller number bidding to provide the core clinical software. EMIS has provided bids for both the core system and the catalogue. As a reminder, EMIS currently generates c 25% of its revenues from the GP Systems of Choice (GPSoC) framework, which the GP IT Futures framework is going to replace from the start of 2020.
EMIS-X development on track
All development milestones for EMIS-X have been met so far, and management expects the first version will be available in FY20. The company has increased the level of investment in the development of EMIS-X during the course of H119, and as restructuring continues, will use cost savings in other areas (for example automating certain areas of customer support through the use of ServiceNow software) to further boost development spend.
The first application based on EMIS-X, a community pharmacy booking app, has been launched and is the first app to be made available in the Patient marketplace. The app links Patient Access with EMIS Web (used in primary and community care) and ProScript Connect (used in community pharmacies). EMIS earns a commission each time a patient books an appointment via the app.
The company expects to start upgrading GPs onto EMIS-X in FY21. Until then, EMIS Web contains sufficient functionality to meet the requirements of the GP IT Futures framework. This includes the recent roll-out approval of the first phase of GP Connect, which provides access to primary care records from a variety of different care settings.
EMIS Enterprise – private sector focused
This division incorporates Patient, Medicines Management (community pharmacy plus the hospital pharmacy business that was previously reported within the Acute business) and Partners & Other (this includes primary and acute care software sold to partners and overseas customers).
In H119, revenues increased 14.3% y-o-y, helped by the sale of some perpetual licences for continuing and legacy products, and adjusted operating profit increased 20.9%.
Medicines Management maintains strong market position
In Medicines Management, community pharmacy maintained its joint leadership position and 37% market share. The roll-out of ProScript Connect to all direct customers was completed within the targeted timeframe. Hospital pharmacy maintained its number two position and saw a small decrease in share from 36% to 35%. For use in both businesses, EMIS released its Falsified Medicines Directive (FMD) authenticator.
Patient Access sees launch of marketplace
The Patient Access app provides information on medical conditions, access to GP records and the ability to make GP appointments and request repeat prescriptions. The number of registered users increased from 7.2 million at the end of FY18 to eight million by the end of H119. Volumes processed by the app increased significantly on a year-on-year basis: log-ins +68%, repeat prescriptions +64% and appointment bookings +66%. As we have written above, the first EMIS-X-based app was launched in the marketplace, to enable users to book appointments at community pharmacies for services like vaccinations. While this booking app can be used by patients whose practice does not use EMIS Web, for those patients whose GPs do use EMIS Web, the pharmacist can send a summary of the consultation back to the GP to be added to the patient’s record in EMIS Web. In H1, Patient Access also launched proxy access – this allows carers/parents to order medication or book appointments for their patients/dependents.
Partners & Other
In some areas where EMIS views solutions as no longer core to its five-year plans, it has entered into perpetual licences with customers to ensure they can continue to have access to the technology without EMIS having to commit resources to maintaining and upgrading the software. The recently acquired Dovetail business sits in this division – the company is working on plans to integrate blockchain into its technology strategy.
Outlook and changes to forecasts
Management expects to meet consensus forecasts for FY19 and continues to target medium-term revenue growth of mid- to high single-digit percentage and operating margins approaching 30%. More specifically, it expects profit growth in the mid- to high single digits for FY19. We have revised our forecasts to reflect H1 results and to incorporate exceptional costs, and we factor in higher spend on product development in FY20 and FY21. We have increased our dividend forecasts for FY19 and FY20 to reflect the higher than expected interim dividend.
Valuation
The stock is up 23% year to date and down 4% over the last three months. Relative to the FTSE AIM index, the stock has outperformed 25% year to date and 2% over the last three months. EMIS is trading broadly in line with its peer group on earnings-based multiples and, due to its superior profitability, at a premium on an EV/Sales basis. Its dividend yield is at the upper end of its peer group. We expect that uncertainty over the outcome of IT Futures is currently weighing on the share price; although we think it is highly unlikely the company would not be selected for the framework, there is still uncertainty around the price that can be charged as well as the future competitive environment. In the longer term, evidence that the company is making progress towards the targets set at last year’s capital markets day (revenue growth 5–9%, operating margins approaching 30%) will be the key catalysts for share price upside.
