Aim-traded software group EMIS (EMIS) has revealed that its web services product has failed to meet its service levels and reporting obligations to GPs surgeries. At present, it is nigh on impossible to tell whether this setback has provided an excellent opportunity to buy into a high-quality company, or if it is just the tip of the iceberg of a much bigger problem.
The former suggestion is more palatable for followers of our buy tip (862p, 23 March 2017). Broker Numis has estimated the financial impact at a one-off £8m and has therefore wiped 5 per cent off its 2018 financial year guidance, leaving the shares trading on 17 times forward earnings, well below the group’s historic average.
However, it is worth questioning whether historic growth rates can be sustained now that EMIS has endured this reputational damage. Primary care services contribute roughly 63 per cent of group revenues and the web product was seen as a big growth driver. The division’s adjusted operating margins – 32 per cent in the 2016 financial year – could also be under threat if EMIS has to invest more in its staff and web service.