EMIS Group — Supporting a more proactive health service

EMIS reported an FY21 trading update in January, at which point we upgraded our numbers to reflect better-than-expected performance and the Edenbridge Healthcare acquisition. Full FY21 results were better than these upgraded forecasts, with revenue 1% and adjusted operating profit 4% ahead of our forecasts. Revenue grew 6% y-o-y, with recurring revenue making up 80% of the total. Adjusted operating profit grew 11% y-o-y with the margin expanding by 1.3pp. Adjusted diluted EPS increased 10% y-o-y. The company confirmed a final dividend of 17.6p, taking the full year dividend to 35.2p, up 10% y-o-y. Net cash improved 21% y-o-y, even after the delayed £7.3m VAT payment in the year.

On a divisional basis, EMIS Health revenue was essentially flat year-on-year. In FY20, this division saw high demand for hardware to help GP practices to continue working through the COVID-19 pandemic; these revenues declined in FY21. As hardware is lower margin than software, this also explains the 1.1pp increase in the adjusted operating margin year-on-year. In FY20, EMIS Enterprise saw a revenue decline of 11.9% due to the pandemic; in FY21 revenue rebounded, growing 16.6% y-o-y and 2.8% compared to FY19, supporting a 1pp increase in the adjusted operating margin. The company noted that last year, there were 25 pilots running for EMIS-X Analytics. In FY21, many of these converted into commercial contracts, with 27 contracts signed in total over the year. While these are spread across customers of both divisions (12 in EMIS Health and 15 in EMIS Enterprise), all revenue is reported in EMIS Enterprise.

In Primary Care, EMIS slightly improved its share of UK GP practices from 57% to 58%. In England, the GP IT Futures framework is due for renewal in March 2023. This will only test the financial viability of companies on the framework, a test that we believe EMIS should easily pass. When the new framework was introduced, GP practices were able to continue with their incumbent supplier without running a formal competitive process until October 2022. The company expects this period to be extended by 18 months due to the impact of the pandemic. EMIS was recently appointed to the Digital Health and Care Wales framework after having not been selected in 2018. Despite not being on the framework, EMIS did not lose any Welsh practices and in fact has recently gained a few. In Northern Ireland, EMIS extended the primary care contract until 2023.

From a technology perspective, the company has completed the first phase of the EMIS-X technology refresh. The next phase of cloud infrastructure upgrades is planned over the next two years, which should improve efficiency and expand margins. The A&E system was upgraded to enable better interoperability and GP software was updated to improve customer satisfaction.

The EMIS-X platform and related analytics are supporting an increasing number of applications. To support health services during the pandemic, EMIS participated in the OpenSAFELY programme. By analysing GP interactions, EMIS has been able to provide data that have helped to update prescribing guidelines and protocols for long COVID. EMIS-X is also being used by NHS organisations to analyse emergency department attendance, peak times and demographic details of patients. EMIS has several projects underway in research and life sciences, including with Pfizer and Bristol Myers Squibb, where it is being used to identify cohorts for clinical research and identify patients at risk of certain conditions.

Community Pharmacy increased its market share from 38% to 39% during the year. Pinnacle’s Outcomes4Health software was used to record more than 100m COVID-19 vaccinations, which was 86% of all vaccinations given. Pinnacle contributed £7.4m to revenue in FY21 compared to £2.2m in FY20. The company expects this to decline by c £2m in FY22 as set-up-related revenues will not recur. As well as continuing to support whatever vaccination programmes the NHS decides to offer, Pinnacle will refocus on its core business of supporting pharmacies to offer consulting room services. EMIS released several new services during FY21 including Pro Delivery Manager (home delivery services management), Centred Solutions (a third-party dispensing workflow solution), PharmaSelf 24 (an automated prescription-collection system, available 24/7) and Golden Tote (an automated repeat prescription process provided for Numark, a division of Phoenix Healthcare Distribution). ProScript Connect was successfully transitioned to the cloud.

Hospital Pharmacy maintained its number two position with market share of 35%, down from 36% in FY20.

New services were made available through Patient Access during FY21, including home-testing kits and diagnostic services. In the year, 51,060 services were booked through marketplace. Registered users increased to 14m from 11.7m in FY20, with 22m repeat prescriptions ordered (FY20: 23.5m), 1.5m face-to-face GP appointments booked (FY20: 2.5m) and 49,000 community pharmacy consultations booked (FY20: 41,000). The number of GP appointments booked declined as practices shifted to online triage, phone consultations and signposting to self-help where appropriate, and community pharmacies provided more treatment of minor illnesses and guidance. Patient.info had 96m unique users viewing 187m pages (FY20: 80m users, 166m page views).

The company had already announced the acquisition of Edenbridge Healthcare in January, paying £4m in cash with a potential further £6m in contingent consideration. Edenbridge generated revenue of £1m and profit of £0.2m last year. Edenbridge provides business intelligence tools to GP practices, federations and commissioners, and expands EMIS’s capabilities in the data and analytics market, providing real-time insight to support GP practice access, efficiency, transformation and workforce planning. Integration between product sets is underway.

With FY21 results, the company announced a second acquisition, FourteenFish, for £15.8m in cash. FourteenFish is a medical appraisals specialist and is the chosen training system of the Royal College of General Practitioners. FourteenFish generated revenue of £2.4m and profit of £1.4m last year.

In FY21, the company formalised its ESG strategy, setting the target of becoming carbon neutral by 2030. A newly formed ESG committee will develop the strategy further, building social value targets and ambitions into corporate strategy.

The company views EMIS-X technologies as offering good potential to accelerate efficiency and growth in both divisions. It is focused on delivering consistent revenue growth and expanding margins. Management noted that it intends to retire some legacy products, particularly in EMIS Health, which we would expect to have a negative impact on revenue, but less so on profitability.

In terms of M&A, the company has a bolt-on strategy and expects to make further acquisitions of a size similar to its recent deals. With net cash of c £44m (£64m at the end of FY21 less the £20m spent on the two acquisitions) as well as undrawn bank facilities of £30m and a further £30m accordion facility, the company is well funded to pursue this strategy.

We have revised our forecasts to reflect FY21 performance and the FourteenFish acquisition and we introduce forecasts for FY24. We have reduced our capex and capitalised development costs and related depreciation and amortisation forecasts for FY22 and FY23. Overall, we upgrade revenue by 1.1% in FY22 and 0.7% in FY23 and adjusted diluted EPS by 3.3% and 3.0% respectively. We note that EPS growth in FY23 and FY24 is lower than EBIT growth due to the increase in UK corporation tax rates from 19% to 25% from April 2023.

Our peer group includes companies involved in clinical, healthcare analytics and medicines management software. The tables below show how EMIS compares in terms of financial performance (Exhibit 4) and valuation metrics (Exhibit 5). EMIS is at the top of its peer group in terms of EBIT margins but is at the lower end in terms of revenue growth and consequently earnings growth. It trades at a discount to the peer group average/median on all profitability metrics, with a dividend yield at the top end of the group. Acceleration of revenue growth will be a key driver of upside. We note that with a strong balance sheet, 80% recurring revenue, no material overseas exposure and no debt, the company is well positioned to weather current economic and geopolitical pressures.