Description
Company Overview
EMIS Group PLC (“EMIS”) is a leading healthcare software company in the UK and is the leading primary care electronic health records (EHR) vendor to the NHS with more than 10k healthcare organizations relying on its products. EMIS operates under two segments:
- EMIS Health: provides integrated care software / technology and electronic patient record systems to the NHS, including primary care, acute care, and community. The product is the #1 provider in the primary care segment with 58% market share – market share has been relatively stable. The software platform supports clinicians in providing integrated care across many different pathways allowing for higher-quality, integrated clinical care. It is the #2 provider in acute care and community with 19% market share in each. In 2022, EMIS Health contributed 59% of total revenue and 54% of adjusted segment profits. Primary care accounted for 44% of revenue, community care for 9%, and acute care for 6%.
- EMIS Enterprise: provides software for B2B healthcare in the UK, including patient-facing services and data & analytics, and medicines management for community and hospital pharmacy. The group is the market leader with 39% market share in community pharmacy. In 2022, the EMIS Enterprise contributed 41% of total revenue and 46% of adjusted segment profits. Medicines management accounted for 24% of revenue, partner services and analytics accounted for 15%, and other patient-facing services 2%.
The company has benefitted significantly from NHS’ desire to increasingly seek digital and data-driven solutions to improve healthcare delivery. EMIS remains key to achieving those goals.
Situation
In June 2022, it was announced that Optum UK, a wholly-owned subsidiary of UnitedHealth, would acquire EMIS for 1,925p per share in cash. This was a 49% premium to the prior day closing price. EMIS was valued at £1.212bn, roughly 25x 2021 EBITDA. Shares collapsed from trading near the deal price in March 2023, when the UK CMA announced that it rejected a proposed remedy to address the CMA’s competition concerns following the Phase 1 investigation and referred the proposed acquisition to a Phase 2 investigation. Subsequently, EMIS and Optum announced that they extended the outside date to for the acquisition by a year from 6/30/23 to 6/30/24 with the deal expected to close in 4Q23 or 1Q24.
While the deal has strategic merit for both companies, should the acquisition ultimately not proceed, EMIS can continue to thrive as a standalone company, and has continued to perform despite the CMA overhang.
The core EMIS Health business is stable with 85% recurring revenue, while the company is investing in and growing the faster-growth, higher margin Enterprise segment, which represented 41% of revenue in 2022 vs. 34% in 2018. Enterprise grew 11% organically in 2022 and is seeing strong growth, particularly in analytics solutions where customer count was count was +52% in 2022. The Enterprise segment has also consistently grown margins – in 2022, the segment reported a 32% adjusted operating profit margin vs. 25% for EMIS Health and up from 25% in 2018. As Enterprise continues to grow faster than Health, the revenue growth. margin profile, and cash generation of the consolidated business will continue to improve.
| EMIS Group Revenue |
| |
2018 |
2019 |
2020 |
2021 |
2022 |
2023E |
2024E |
| Revenue |
|
|
|
|
|
|
|
| Health |
99.3 |
100.9 |
107.8 |
107.9 |
103.9 |
106.0 |
108.1 |
| YoY |
|
1.6% |
6.8% |
0.1% |
-3.7% |
2.0% |
2.0% |
| % of Total |
66.3% |
63.3% |
67.6% |
64.1% |
59.2% |
57.4% |
55.5% |
| Enterprise |
50.4 |
58.6 |
51.7 |
60.3 |
71.5 |
78.7 |
86.5 |
| YoY |
|
16.3% |
-11.8% |
16.6% |
18.6% |
10.0% |
10.0% |
| % of Total |
33.7% |
36.7% |
32.4% |
35.9% |
40.8% |
42.6% |
44.5% |
| Total |
149.7 |
159.5 |
159.5 |
168.2 |
175.4 |
184.6 |
194.6 |
| YoY |
|
6.5% |
0.0% |
5.5% |
4.3% |
5.3% |
5.4% |
| |
|
|
|
|
|
|
|
| EMIS Group EBITDA |
| |
2018 |
2019 |
2020 |
2021 |
2022 |
2023E |
2024E |
| Adj. Operating Income |
|
|
|
|
|
|
|
| Health |
25.2 |
23.3 |
25.1 |
26.3 |
26.4 |
27.0 |
27.6 |
| % Margin |
25.4% |
23.1% |
23.3% |
24.4% |
25.4% |
25.5% |
25.5% |
| Enterprise |
12.8 |
17.5 |
15.7 |
18.9 |
22.8 |
26.0 |
29.4 |
| % Margin |
25.4% |
29.9% |
30.4% |
31.3% |
31.9% |
33.0% |
34.0% |
| Less: Corporate |
(2.1) |
(1.5) |
(1.5) |
(1.7) |
(1.5) |
(1.5) |
(1.5) |
| Total Adj. OI |
35.9 |
39.3 |
39.3 |
43.5 |
47.7 |
51.5 |
55.5 |
| % Margin |
24.0% |
24.6% |
24.6% |
25.9% |
27.2% |
27.9% |
28.5% |
| YoY |
|
9.5% |
0.0% |
10.7% |
9.7% |
7.9% |
7.8% |
| Plus: D&A |
6.5 |
7.7 |
6.2 |
5.3 |
5.4 |
6.0 |
6.5 |
| Total Adj. EBITDA |
42.4 |
47.0 |
45.5 |
48.8 |
53.1 |
57.5 |
62.0 |
| % Margin |
28.3% |
29.5% |
28.6% |
29.0% |
30.3% |
31.1% |
31.8% |
| YoY |
|
10.9% |
-3.1% |
7.2% |
8.7% |
8.2% |
7.8% |
Opportunity
EMIS shares are trading at 1350p, 4% above the share price prior to the acquisition announcement despite growing revenue and EBITDA since that time. Valuation is undemanding at ~14x 2023E EV/EBITDA, in-line/slight discount to UK software and health-tech companies, with a FCF yield of ~6% and a dividend yield of 3%. I believe there is little downside left if the deal breaks and current valuation places close to 0% probability on the acquisition proceeding – over the last 5 years, 41% of deals going into Phase 2 investigation have been cleared by the CMA. This creates an attractive upside / downside setup in the stock. If cleared, there is 43% upside to the current share price. However, shares are trading near the break price and even absent the deal closing, valuation should be improving with growth in the higher-quality Enterprise business.
| EMIS Group Capital Structure |
| |
|
EV / EBITDA |
| Capital Structure (as of 12/31/22) |
2022 |
2023E |
2024E |
| Debt |
- |
|
|
|
| Less: Cash |
45.9 |
|
|
|
| Net Debt |
(45.9) |
|
|
|
| |
|
|
|
|
| Shares |
63.3 |
|
|
|
| Share Price |
1,350.0 |
|
|
|
| Market Cap |
854.7 |
|
|
|
| |
|
|
|
|
| Enterprise Value |
808.8 |
15.2x |
14.1x |
13.0x |
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
CMA Deal Clearance: If the deal clears Phase 2 investigation, the transaction will be allowed to proceed.
Enterprise Growth: Absent a deal, continued growth in Enterprise will improve the financial profile and valuation.