I like a lot of things about Emis Group (LSE: EMIS). It operates as a software and support company mainly serving the NHS in all its forms, including GP practices, hospitals pharmacies, and satellite healthcare centres.
Right off the bat, I’ll acknowledge that although the firm works for a variety of organisations funded by the NHS, there must be an element of single-customer risk. If Emis fails to deliver what the NHS needs, and at the right price, it could drop, or fail to renew, its contracts with Emis in favour of other contractors and suppliers. I can imagine a scenario where it would then be difficult for, say, a GP practice to opt for the services of Emis if the NHS doesn’t like or has blacklisted the firm. After all, I reckon the majority of GPs work to NHS contracts, follow NHS guidelines and see NHS patients.
Trading well
However, there’s no sign of anything like that happening and the NHS/Emis combination seems to be getting on just fine. And it’s good business for Emis. I like the long record of growing revenue, normalised earnings, and operating cash flow. And I like the steady growth in the dividend that has been going on for years. On top of that, the balance sheet is strong with a pile of net cash. As long as the company keeps its house in order and delivers a good service, I reckon the business has defensive characteristics. Revenues and cash inflows are unlikely to dip because of a general economic slowdown. But profits could fall if Emis makes a mess of things with its service delivery, or if the NHS starts dropping contracts with the firm. So the firm’s future prosperity seems to be in its own hands and today’s trading update for the year is encouraging.
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Trading was “in line with the Board’s expectations,” which means full-year revenue came in “ahead” of the previous year’s and the firm “continued to benefit from growing recurring revenues and strong market shares.” I reckon that recurring revenues bolster the case for the company’s defensiveness and it’s good to learn they are expanding.
A positive outlook
All four divisions performed well in the period with growth and contract wins in some areas of operations. Meanwhile, the net cash position increased by more than 11% to £15.6m, suggesting the company is converting its revenue into decent cash earnings. We can find out more with the full-year results due on 20 March, but my impression is that trading has been solid.
City analysts expect earnings to increase by about 8% this year and again in 2020, with the dividend rising a little each year too. The firm is priced fairly, in my view, given the high quality of earnings. Today’s share price close to 897p throws up a forward-looking earnings multiple of just under 17 for 2020, and the forward dividend yield is almost 3.7%. On balance, I’d be happy to dip my toe in the water by buying a few of the company’s shares.
