EMIS Group — Update 14 April 2016

TMT

EMIS Group

Pausing for breath

FY15 results

Software & comp services

14 April 2016

Price	1,021p
Valuation	1,060p
Difference	3.8%
Market cap	£646m

Net debt (£m) at end FY15		9.1

Shares in issue	63.3m
Free float	74.7%
Code	EMIS

Primary exchange	AIM
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	(4.6)	(10.2)	17.8
Rel (local)	(4.1)	(10.7)	28.5

52-week high/low

1155p

860p

Business description

EMIS is a clinical software supplier to the primary care market in the UK (supplying over 50% of UK GP practices), a software supplier to UK pharmacies, and through several acquisitions also supplies specialist and acute care software.

Next events

AGM	26 April 2016
H116 trading update	July 2016
H116 results	2 September 2016

Analysts

Katherine Thompson	+44 (0)20 3077 5730
Dan Ridsdale	+44 (0)20 3077 5729

tech@edisongroup.com

EMIS managed to achieve solid profits in FY15 despite the previously flagged weakness in the Secondary Care business. The company has taken action to restructure this business and continues to expect revenue and profit growth at a group level in FY16. We have trimmed our forecasts to reflect the lower revenue base in FY15, with our normalised EPS forecasts reducing by 3.0% in FY16 and 2.3% in FY17. Improving momentum in Secondary Care contract wins and further wins in CCMH and integrated healthcare could drive upside from this point.

Year end	Revenue (£m)	EBITDA (£m)	EPS* (p)	Net (debt) / cash	P/E (x)	Yield (%)
12/14	137.6	47.6	42.8	(11.8)	23.9	1.8
12/15	155.9	52.0	46.0	(9.1)	22.2	2.1
12/16e	166.8	56.1	48.9	2.2	20.9	2.2
12/17e	176.9	59.6	52.2	23.0	19.5	2.3

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY15 profitability maintained despite revenue miss

FY15 results were in line with downwardly revised expectations from the January trading update. Good performances from Primary Care, CCMH and Community Pharmacy were offset by a lower level of contract signings in Secondary Care, to result in revenue growth of 13% y-o-y (5% organic) and adjusted operating profit of £36.6m (23.4% margin). To improve performance of the Secondary Care business, divisional management, sales and product development have been restructured.

FY16 forecasts trimmed

The company expects to achieve mid- to high single digit revenue growth in FY16 with adjusted operating profit in the high £30m/low £40m range. We have trimmed our revenue forecasts to factor in the lower Secondary Care revenues in FY15 for FY16; this is partially offset by restructuring of this business. We reduce our FY16 adjusted operating profit forecast by 4.3% to £39.2m and reduce our EMIS adjusted EPS forecast by 3.3% in FY16 and 2.5% in FY17 (normalised EPS -3.0% and
-2.3% respectively).

Valuation: Secondary Care holds key to upside

The stock is trading at a c 8% premium to peers on an FY17e normalised EPS, which is fair in our view given EMIS’s superior profitability, supported by a dividend yield of c 2%. To see upside from here, we need there to be momentum in Secondary Care contract wins and consequently improving profitability, more integrated healthcare contract wins and beating market share targets in CCMH from winning more of the North New and Refresh contracts. Longer term, the roll-out to the newly signed Lloyds pharmacies should provide a boost to profitability.

Review of FY15 results

EMIS reported FY15 revenues in line with the guidance given in its January trading update, generating year-on-year growth of 13% (organic growth 5%), and 20% growth in recurring revenues. Revenues came in lower than originally expected due to weaker performance from the Secondary Care business; despite this, the company reported cash R&D adjusted operating profit substantially in line with expectations. Reported operating profit was reduced by a £16.2m goodwill impairment charge for the Ascribe acquisition and a £2.3m impairment charge for the company’s minority investment in Pharmacy2U. A combination of factors (unwinding of deferred income, reduced bonus accrual, slightly higher capex and tax) meant that net debt was £6.8m higher than our forecast. The company announced a final dividend of 10.6p, to result in a full year dividend of 21.2p.

Exhibit 1: FY15 results highlights

£000s	FY15e	FY15a	Change	y-o-y
£000s
Revenues	160,488	155,898	-2.9%	13.3%
Normalised operating profit*	37,577	37,123	-1.2%	6.7%
Reported operating profit	30,442	11,430	-62.5%	-60.7%
Adjusted operating profit**	36,897	36,553	-0.9%	12.0%
Normalised EPS - p	45.7	46.0	0.6%	7.5%
Reported EPS - p	36.9	7.2	-80.4%	-79.5%
Adjusted EPS - p	44.0	45.1	2.5%	14.5%
Net cash/(debt)	(2,338)	(9,109)	289.6%	-22.9%

Source: EMIS, Edison Investment Research. Note: *Excludes amortisation of acquired intangibles, exceptionals and share-based payments. **EMIS adjusted: as for normalised, but accounts for development costs on a cash basis.

Business update

Primary and Community care (60% of FY15 revenues)

GP market share increased to 54.9% (5,210 practices) up from 53.1% at the end of 2014. The EMIS Web rollout is complete in England and for EMIS LV users in Wales. In Northern Ireland, EMIS Web will be rolled out to half the sites in 2016 and the remaining sites in 2017. In Scotland, it is expected that practices using EMIS PCS will move over to EMIS Web – the procurement method has not yet been finalised but is expected to take place in 2016. The UK MoD contract (based on a variant of EMIS PCS) was extended until April 2019, with discussions underway to move to EMIS Web.

The number of CCGs1 using solely EMIS GP software has risen from 32 to 44 over the year (21% share of CCGs). This enables better data sharing within the CCG and makes the use of EMIS Web elsewhere in the healthcare community more attractive.

Clinical commissioning group

The company had hoped to win some new GP customers when the contracts assigned as part of the National Programme (NPfIT) come to an end in July 2016. TPP won close to 2,000 contracts in the North, Midlands and East of England (NME) as subcontractor to CSC, the local service provider (LSP), whereas EMIS was never part of NPfIT. When the time came to renew the contracts, most CCGs decided to keep their practices on TPP software so the chance to for EMIS to win new business did not arise.

The CCMH2 business grew its market share to 12%, up from 8% at the end of FY14 and beating its year-end target of 10%. The target for end FY16 is 15%. The company won contracts worth more than £10m in the year. The London and South CCMH procurement process is now complete; the next area to target is the NME – for both the refresh of sites that received software as part of NPfIT and for those practices that did not receive any software at the time. This amounts to c 180 entities that will need to select or renew CCMH software over the next couple of years. New contract wins in 2015 include East Lancashire Hospitals NHS Trust, Central Manchester Foundation Trust, Pennine Acute Hospitals NHS Trust and Southport & Ormskirk Hospitals NHS Trust. In 2016, the company has also signed a contract with South Tyneside NHS Trust and extended a contract with Stockport NHS Foundation Trust.

Child Community and Mental Health

Secondary and Specialist care (27% of FY15 revenues)

Secondary Care won fewer new contracts than expected, which negatively affected revenues and profits for the year. A new management team for this business was appointed in 2015, and changes were made to refocus the business. This includes improving the software release quality and restructuring the sales team to focus on small and medium-sized deals while continuing to work on large deals. The product roadmap has been reviewed in detail and consequently refreshed, to provide a rationalised product set and to support convergence within healthcare. Product development has been restructured, with the majority to be undertaken by the new EMIS India development centre and the closure of development operations in Australia and New Zealand (by December 2017) and Kenya (by June 2016).

EMIS Health – Specialist and Care business performed well in the year, boosted by recent acquisitions Indigo4 and Medical Imaging. The Specialist part of the business provides diabetic eye screening software and other ophthalmology-related solutions. Public Health England announced in January that it would be seeking a single software solution in England for diabetic eye screening – with its 79% market share in England (by programme), EMIS is in a strong position to tender for this business. Medical Imaging’s diabetic eye screening and ophthalmology imaging services have been rebranded as EMIS Care.

Community Pharmacy (13% of FY15 revenues)

Market share was maintained at 36% of the combined independent and supermarket market. EMIS recently announced that it signed a new five-year contract with AAH, which will incorporate c 1,800 Lloyds pharmacies for the first time and should take EMIS’s community pharmacy market share to nearly 50% over the next 18 months. Management does not expect to see a profit contribution from this new business until 2018. The business has spent c £1m developing its next generation ProScript Connect software during the year – this is in pilot and is scheduled to launch in 2016. EMIS Web is being trialled by some pharmacies in anticipation of them being able to offer primary care services, with launch scheduled for 2017.

Outlook and changes to forecasts

In FY16 the company expects to generate revenues in the upper £160m range, with operating profit in the higher £30m/low £40m range. Net debt is expected to move to a net cash position (low single digit £m) by the end of FY16. The company has increased its capex budget for FY16 to c £10m (versus £6m in FY15) with roughly half of this allocated to purchase of hosting assets. We have revised down our revenue forecasts, reflecting the weaker performance in Secondary Care. At the operating profit level, we have assumed some cost savings from the Secondary Care restructuring and do not yet factor in material upside from the recent Pharmacy contract win. Overall, this results in a 3.0% cut to FY16e normalised EPS and 3.3% cut to EMIS adjusted EPS. In FY17e, we reduce normalised EPS by 2.3% and EMIS adjusted EPS by 2.5%. The company expects to move to a low single-digit million net cash position by the end of FY16.

Exhibit 2: Changes to forecasts

£'000s	FY16e	FY16e	Change	y-o-y	FY17e	FY17e	Change	y-o-y
£'000s	Old	New			Old	New
Revenues	170,038	166,805	-1.9%	7.0%	179,058	176,856	-1.2%	6.0%
Normalised operating profit	41,103	39,971	-2.8%	7.7%	43,440	42,563	-2.0%	6.5%
Reported operating profit	33,968	32,314	-4.9%	182.7%	36,304	34,906	-3.9%	8.0%
Adjusted operating profit	41,016	39,249	-4.3%	7.4%	43,923	42,344	-3.6%	7.9%
Normalised EPS - p	50.4	48.9	-3.0%	6.3%	53.5	52.2	-2.3%	6.8%
Reported EPS - p	41.5	39.4	-5.2%	443.6%	44.6	42.7	-4.3%	8.5%
Adjusted EPS - p	49.4	47.8	-3.3%	5.9%	53.2	51.9	-2.5%	8.6%
Net cash/(debt)	15,986	2,244	-86.0%	-124.6%	38,302	22,995	-40.0%	924.6%

Source: Edison Investment Research

Exhibit 3: Financial summary

	£'000s	2012	2013	2014	2015	2016e	2017e
Year end 31 December
PROFIT & LOSS
Revenue		86,333	105,542	137,639	155,898	166,805	176,856
Cost of Sales		(10,891)	(11,780)	(12,782)	(12,955)	(17,414)	(18,994)
Gross Profit		75,442	93,762	124,857	142,943	149,390	157,862
EBITDA		33,178	38,885	47,645	51,964	56,129	59,584
Operating Profit (before amort. of acq. intang, SBP and except.)		27,619	30,482	34,787	37,123	39,971	42,563
Amortisation of acquired intangibles		(2,983)	(4,198)	(6,269)	(6,509)	(6,657)	(6,657)
Exceptionals		(435)	(1,144)	873	(18,500)	0	0
Share-based payments		(90)	(195)	(270)	(684)	(1,000)	(1,000)
Operating Profit		24,111	24,945	29,121	11,430	32,314	34,906
Net Interest		(76)	(242)	(543)	(449)	(250)	(150)
Profit Before Tax (norm)		27,567	30,172	34,206	36,625	39,701	42,423
Profit Before Tax (FRS 3)		24,059	24,635	28,540	10,932	32,044	34,766
Tax		(4,625)	(4,706)	(5,719)	(5,558)	(6,569)	(7,127)
Profit After Tax (norm)		23,191	25,179	27,617	29,801	31,562	33,726
Profit After Tax (FRS3)		19,434	19,929	22,821	5,374	25,475	27,639

Average Number of Shares Outstanding (m)		58.2	59.4	62.8	62.7	62.8	62.8
EPS - normalised (p)		39.0	41.4	42.8	46.0	48.9	52.2
EPS - FRS 3 (p)		32.5	32.6	35.3	7.2	39.4	42.7
Dividend (p)		14.2	16.0	18.4	21.2	22.4	23.2

Gross Margin (%)		87.4%	88.8%	90.7%	91.7%	89.6%	89.3%
EBITDA Margin (%)		38.4%	36.8%	34.6%	33.3%	33.6%	33.7%
Operating Margin (before GW and except.) (%)		32.0%	28.9%	25.3%	23.8%	24.0%	24.1%

BALANCE SHEET
Fixed Assets		77,673	153,838	166,415	143,546	137,831	129,554
Intangible Assets		52,789	126,468	139,397	121,383	113,768	105,591
Tangible Assets		22,144	24,610	24,313	22,032	23,932	23,832
Other fixed assets		2,740	2,760	2,705	131	131	131
Current Assets		27,538	27,046	37,221	39,800	49,338	71,599
Stocks		1,243	1,431	1,550	1,206	1,206	1,206
Debtors		15,188	21,448	28,732	33,893	35,878	38,388
Cash		11,107	4,167	6,939	4,701	12,254	32,005
Current Liabilities		(30,598)	(54,530)	(67,665)	(63,819)	(58,819)	(60,578)
Creditors		(30,202)	(46,628)	(54,763)	(51,960)	(48,960)	(51,719)
Short term borrowings		(396)	(7,902)	(12,902)	(11,859)	(9,859)	(8,859)
Long Term Liabilities		(10,548)	(22,231)	(21,063)	(12,481)	(10,681)	(10,681)
Long term borrowings		(3,000)	(9,756)	(5,854)	(1,951)	(151)	(151)
Other long term liabilities		(7,548)	(12,475)	(15,209)	(10,530)	(10,530)	(10,530)
Net Assets		64,065	104,123	114,908	107,046	117,669	129,894

CASH FLOW
Operating Cash Flow		32,732	38,725	44,856	42,711	54,144	59,832
Net Interest		(60)	(580)	(445)	(422)	(150)	(50)
Tax		(4,566)	(5,073)	(5,247)	(6,896)	(8,139)	(8,697)
Capex		(18,342)	(15,025)	(15,161)	(14,058)	(17,100)	(15,400)
Acquisitions/disposals		(512)	(57,315)	(9,959)	(4,587)	(3,000)	0
Financing		(1,816)	27,212	(1,578)	492	(600)	(500)
Dividends		(7,735)	(9,146)	(10,792)	(14,532)	(13,802)	(14,435)
Net Cash Flow		(299)	(21,202)	1,674	2,708	11,353	20,751
Opening net debt/(cash)		(8,026)	(7,711)	13,491	11,817	9,109	(2,244)
HP finance leases initiated		0	0	0	0	0	0
Other		(16)	0	0	0	0	0
Closing net debt/(cash)		(7,711)	13,491	11,817	9,109	(2,244)	(22,995)

Source: EMIS, Edison Investment Research

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