EMIS poised to benefit from NHS challenges

EMIS offers its software services in primary, secondary, pharmacy and specialist care. Although each of the divisions has competitors, none of these operate throughout the entire UK healthcare system. EMIS is therefore in an advantageous position as it makes sense for all health operators to be hooked up to the same software system. With 209 clinical commissioning groups in the UK, 252 trusts and 7,674 GP practices, the market opportunity is huge. The group's growth has been reassuringly steady given the historic tendency of companies that have tried to correct all the NHS's IT problems to overextend themselves. EMIS has gained commanding positions in its three key markets and currently has between 16 per cent and 55 per cent market share.

Its clients are loyal, with more than three-quarters of current contracts in place for over 10 years. The group rarely loses contracts due to the effort involved in transferring patient data from one software supplier to another. EMIS's visibility is therefore excellent, with recurring revenue contributing just over four-fifths of total sales in 2016.

Divisionally, the group's performance last year was largely positive. The primary care business (63 per cent of sales and 80 per cent of operating profits) maintained its 55 per cent market share last year and increased revenues and adjusted operating profit by 6 per cent and 9 per cent, respectively. In pharmacy (13 per cent of revenue and 12 per cent of profit), EMIS's market share is fast approaching 50 per cent thanks to adding the Lloyds pharmacy chain as a client in 2016. The secondary and specialist care division (24 per cent of revenue and 8 per cent of profit) has faced challenges due to NHS spending cuts and the impact of contract set-up costs on margins. Overall, the operation's revenues fell by a tenth last year and profits by a fifth. Nevertheless, it signed new contracts worth £19m in 2016 and restructuring has brought down costs.

The financial position looks good. Despite £3.1m of cash costs associated with restructuring, net operational cash flows rose 4 per cent to £38m last year and net debt fell to just £400,000. The group now plans to invest £7m, split evenly over the next two years, to increase revenues from its Patient.info online system - the UK's leading independent provider of medical information - from £2m to about £50m over five years. The investment will be booked through the profit-and-loss account, which is the reason for the depressed level of earnings forecast for 2017 and 2018 in the accompanying table.