EMIS (LON:EMIS) - A High Price For Revenue Visibility

19th May '22 by Jack Brumby

10 comments 2129 reads

The market is in an unforgiving mood. Input and wage inflation, stressed supply chains, and staff shortages concerning business leaders and investors alike. But some companies are better able to handle these pressures than others. Namely, companies with business models that characterised by:

high operating margins,
high margin stability and scope for operational leverage, and
high levels of R&D as a proportion of sales.

One such candidate is EMIS (LON:EMIS) , a provider of software to the NHS. Growth has been slow in recent years but its relatively stable mix of strong market positions, technology investment, and multi-year revenue visibility remains highly coveted.

Its operating margin stands at around 21% and the group aspires to increasing profitability. From its most recent annual report:

The Group’s target continues to be increasing operating margins towards 30%, which implies a faster rate of growth in profit than in revenue, to be delivered by operational leverage and greater efficiency in the Group’s systems.

The shares are not cheap at 22.1x forecast earnings and many expensive stocks have derated over the past couple of weeks. But could Emis buck that trend and provide private investors with safe harbour?

oKuvR5pKzBpNC5SWzY1TKQofcCX4N6YPDJah_CW5pgCs09ODFSrmz2mbyhvlNmq5pLXj4xt8r8FvBtQKiCy64jnviS-heB_-mf02HXA8vUuqfpC5GFtmprNl9y6dei1mGpRc42gC0FXVtzFK6A

Profile

What are the company's principal business activities, how does it generate its revenues?

EMIS is listed on the AIM market with a market cap of c£813m, operating in the Healthcare sector. Liquidity is very good, with a 46bps spread and an EMS of 1,500 meaning around £20k can be reliably bought or sold at market prices.

The group supplies clinical software to the UK healthcare market and was originally established to serve the GP market, where it has a leading position with a market share of 57% of UK GP practices. It has broadened its range of products over the years and now serves the community healthcare market, the acute sector, and community pharmacies (where it has c 37% share).

It has main operating segments, each occupying a dominant market positions built up over 35 years providing front line technology to the healthcare sector.

EMIS Health focuses on delivering core software and ancillary services to NHS organisations. It generated 64% of group revenue in FY21.

EMIS Enterprise is mainly private sector and generated 34% of group revenue in FY21. The company is aiming to move towards a 50:50…

Unlock with Email

Unlock with Google

Already have an account?
Login here

shamusj

20th May '22

Thanks for the great write up. I had a look at EMIS (LON:EMIS) a couple of weeks ago, but I preferred Kainos (LON:KNOS) as a better GARP stock. Kainos (LON:KNOS) doesn't have the single entity concentration risk (although it does have a large proportion of public sector revenue), and has been battered down due to Macro uncertainty and broker downgrades (again due to Macro wage inflation which affects all IT employers fairly equally IMO).

£KNOS sales and EPS CAGR over the last few years has been much higher than EMIS (LON:EMIS) and most of it is organic.

Take care,

scrooge

£EMIS Thanks Jack. I have held EMIS (LON:EMIS) in my ISA to supplement retirement income- a reliable (as equities go) stock with low risk and an established, growing dividend. The biggest risk to the company comes from software failure, either updates or add-ons that don't work as intended (this has happened once) or security failures. Because of the high profile nature of what they do, and with one large customer, any problems could prove to be big ones. But they have managed these so far......

AnonymousUser1782684

Thanks Jack for the write up of EMIS (LON:EMIS). Great to see a healthcare stock review.

In regards to the risk of being a "single large customer in the form of the NHS". In a way, I see it as a strength as well because it's not easy to become an NHS supplier.

BnB

The NHS operates more like a collection of hundreds of purchasing bodies, rather like government with its multiple tiers, so I wouldn't worry particularly about the single client risk. I'd be more concerned about competition from other suppliers. For example, Palantir has had great success working with the NHS on the vaccine programme and is sure to look to expand its reach with a its far more impressive technology. Nevertheless, EMIS certainly has a moat derived from its entrenched and sticky relationship. The CAGR (incl divis) of just under 8% pa over the last 5 years is pretty solid, which is how I would view the company.

Thanks, BnB, good you confirmed what I thought regarding a moat.

23rd May '22

A lovely update from Kainos (LON:KNOS) today. Especially the recurring revenue jump.

Nothingventured

20th Jun '22

Now subject to a takeover bid. SP has settled south of the offer price by some margin. Should we stick or twist?

DaviStoVest

21st Jun '22

What company???

OK ... I can see now. I hadn't registered this was a company specific thread.

Maddox

25th Jun '22

I'm disappointed to see EMIS being taken-over. Classic timing - an offer just as they come to the end of an investment cycle that has supressed profitability and thus market valuation. The acquirer will thus benefit from a fully developed proposition just poised to attack the market and generate growth, widen margins and trigger a re-rating after tracking sideways.

EMIS has been on my radar for a while and a candidate for scaling-up - so getting taken out at a profit, but overall an opportunity lost.

GLA on your re-investments.

EMIS (LON:EMIS) - a high price for revenue visibility

Profile

Unlock the rest of this article with a 14 day trial

About the Author

Jack Brumby

10 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...