Craneware reaches for higher ground

Healthcare software company Craneware’s (CRW) results for the year to June 30 beat upgraded consensus by a whisker, with adjusted cash profits increasing by nearly 8 per cent to $27.1m (£19.7m), as it migrated more of its customers to cloud-based services. But it is the post-year-end deal for Sentry Data Systems that is most likely to shape the company’s future. Craneware, which closed the prior year with net assets of $68.4m, expanded its balance sheet significantly in anticipation of the deal, eventually shelling out $400m for Florida-based Sentry. Although $87.5m of this will be satisfied in Craneware shares, it has borrowed $120m and completed a $187m share placing to finance the deal.

Chief executive Keith Neilson described the acquisition as “a real step change”. Both companies offer software to help hospital pharmacies operate more efficiently, but Sentry’s focuses on drug discount programmes for poorer customers, while Craneware’s targets fully paid-for drugs. There is also little overlap in terms of customers – only 35 per cent of Sentry’s hospitals are existing customers.

Revenue is forecast to double to more than $156m and cash profits are expected to increase substantially. Both businesses are also cash-generative, managing “pretty much 100 per cent” conversion of earnings into cash, Neilson said. And revenue visibility for the next three years has increased from almost $200m to $471m.

The cross-selling opportunities are more significant than cost savings, but progress is already being made with the latter, convincing Peel Hunt to increase its cash profit forecast by 3 per cent to $51.3m. The broker makes the point that it has a much lower enterprise to cash profits (EV/Ebitda) ratio of 21 times than the peer valuation of about 30 times, suggesting there could be relative value on offer. Although this is a big deal for the company to digest, if it delivers on its prospects a re-rating should follow, though the focus will now switch to the combined operating margin. Buy.

Last IC View, Buy, 1,615p, 21 Sep 2020