Craneware merger with Sentry shows promising signs

The key for Craneware (CRW) is to prove its integration of US pharmacy software business Sentry is going to be a success. That means bringing down unnecessary costs and proving that it can actually upsell software to new customers it has just acquired.

So far, cost control is going well. The anticipated synergies have delivered a cash profit (Ebitda) margin of above 30 per cent; and ahead of time. The margin was down from 36 per cent last year, but that was due to the diluting impact of the Sentry deal. Sentry also diluted adjusted cash conversion from 99 per cent last year to 80 per cent this year.

But the acquisition is boosting the cloud transition. Some 80 per cent of group revenues now come from cloud systems, up from 16 per cent last year. The hope is that Craneware will be able to cross-sell its new cloud-based Trisus platform to Sentry’s customers. It says it has already achieved some successful transactions.

Service revenues fell because there were fewer staff in hospitals, but management expects this to normalise. This normalisation, coupled with the pipeline for future customers generated by cross-selling, means house broker Peel Hunt expects revenue to grow22 per cent to $202mn (£177mn) in 2024.

The top-line growth forecast feeds through to 2024 earnings per share of 111¢ (up 26 per cent) and an affordable 2024 price/earnings ratio of 18.6. We agree that Craneware is undervalued as outlined in our recent Idea article (‘Is Craneware the next UK software takeover target?’, IC, 9 September 2022). Potential acquirers might think something similar. Buy.

Last IC View: Buy, 1,715p, 14 Mar 2022