Software for healthcare

EMIS is a UK-based software-as-a-service (SaaS) provider. It creates, sells, and maintains many systems that the NHS and GP surgeries use. Its best known product is Patient Access, which allows the public to manage their healthcare needs.

As I write, EMIS shares are trading for 1,890p. At this time last year, the stock was trading for 1,392p, meaning it has seen a 35% return over a 12-month period. When news of the takeover bid broke in June, the shares instantly spiked by approximately 50% to current levels, and have remained there since.

Takeover bid

Back in June, health services business Optum UK bid £1.24bn, or 1,925p per share, for EMIS. The offer was a 49% premium to EMIS’ closing share price the day before the offer was announced. Since then, the EMIS board has approved the takeover but the legal process has not yet been completed. This means there is still a chance it may not happen.

Based on information released to date, Optum is looking to take EMIS to new heights and drive growth. Details around what the company will look like have not been released just yet. Based on my research I’m guessing EMIS will still operate as an independent business, away from the parent company, but I could be wrong. Time will tell.

The EMIS investment case

First off, I’m buoyed by EMIS’ business model. Due to the complex and essential nature of its solutions, many of them are what is referred to as ‘sticky’ software products in the industry. This basically means they remain in place for a long time as they can be tough and time-consuming to replace. The positive here is that EMIS generates lots of recurring revenue, which helps boost growth and shareholder returns.

At present, EMIS shares would boost my passive income stream through dividends. The current dividend yield on offer is 1.9%, which is in line with the FTSE 250 average of 1.9%. I am aware that dividends can be cancelled, however.

Finally, I can see EMIS has a good track record of performance. I am conscious that past performance is no guarantee of the future. However, looking back, I can see it has grown revenue and profit in the past three out of four years. In 2020, levels dipped slightly, due to the pandemic.

So looking at some risks, EMIS shares are trading at all-time highs, on a price-to-earnings ratio of close to 40. If the takeover does not happen, or any other negative news were to emerge, the shares could fall significantly.

Taking everything into account, I’ve decided to keep EMIS on my watch list for now. The lack of clarity around the takeover, as well as what the company may look like if the takeover is successful helps me come to my conclusion. The FTSE AIM incumbent’s current valuation is also a tad high for my liking.

IT healthcare business

Emis provides healthcare-related software services for general practice (GP) surgeries around the UK. One of its key products is Patient Access, which is a platform offered to patients to book appointments as well as request prescriptions and access general medical information. It also played a role in supporting the NHS during the pandemic using its Outcomes4Health platform to support the vaccination rollout.

As I write, Emis shares are trading for 1,258p. At this time last year, the shares were trading for 1,122p, which is a 12% return over a 12-month period.

Should I buy this FTSE stock?

FOR: I always look at a stock’s performance track record. I do understand that past performance is not a guarantee of the future, however. Looking back, I can see Emis has consistently performed well in terms of revenue and profit for the past four years. Coming up to date, it released a post-close trading update at the end of last month. Emis reported growth compared to 2020 levels and confirmed a couple of new acquisitions. It also mentioned its healthy cash balance and a generally robust balance sheet. Full results will be due next month.

AGAINST: Emis shares look a bit expensive at current levels. They are trading at a price-to-earnings ratio of close to 28. This tells me that growth could already be priced in. Furthermore, any negative news or a drop in performance could send the share price on a downward trajectory.

FOR: Emis operates in a market whereby the products it sells aren’t the type to be replaced regularly and there is a high likelihood of repeat custom. I call these “sticky” software solutions and these are embedded into a GP’s infrastructure. This could help boost performance and growth. Emis also pays a dividend with a yield of 2.5%. This is higher than the FTSE AIM and FTSE 250 averages. I do understand dividends can be cut or cancelled, however.

AGAINST: The healthcare software market is extremely competitive. There are many players vying for market dominance. I also believe the recent pandemic has exacerbated the need for cutting-edge software to help healthcare providers operationally and provide patients with technological solutions to help complete day-to-day tasks. Emis could see its market share affected, which could then affect performance and any returns.

My verdict

There is a lot to like about Emis in my opinion. It has a long history and good track record of performance as well as the fact it pays a dividend to help me make a passive income. It has a good footprint in the UK and is growing via acquisitions and organically too.

I would add Emis shares to my holdings. I believe it is one of the best stocks for me to buy on the FTSE AIM index currently and I am keen to see full-year results next month.

A bargain buy?

My first pick is pharmaceutical services firm Clinigen Group (LSE: CLIN). This business supplies unlicenced treatments and hard-to-find medicines. It also supports clinical trials. The group operates in most major markets worldwide and generated sales of over £500m last year.

Clinigen’s share price has risen by 250% since its flotation in 2012. Profits have risen from £4.3m to £13.7m over the same period. The dividend has been increased every year since 2013. Growth has come through a mix of acquisitions, partnerships, and internal expansion.

For example, the company recently inked a deal to supply Erwinase in the UK. This is a leukaemia treatment that’s produced by specialist Porton Biopharma. Clinigen will market, package, label, store and distribute Erwinase in the UK, providing a service that smaller pharma firms like Porton can’t easily match.

The main concern I have about buying Clinigen today is the company’s recent warning that sales of some cancer treatments have been lower than expected, due to Covid-19. Management expect demand to return to normal over time, but profits for the current year will now be lower than previously forecast.

However, Clinigen’s warning caused the stock to tumble and this UK share now trades on just 10 times forecast earnings. In my view, this should be cheap enough to compensate for this year’s disappointing results.

I think Clinigen looks decent value, given the company’s track record. This is a share I’d be happy to buy today for my long-term portfolio.

A UK healthtech share

One UK share I’ve been buying recently is healthcare IT group EMIS Group (LSE: EMIS). It provides software for many GP surgeries and pharmacies around the UK. One popular product is Patient Access, which is used to book appointments and request repeat prescriptions.

The company has also played a key role in providing IT support for the NHS during the pandemic. One system, Outcomes4Health, is being used to support England’s vaccination programme.

Although EMIS faces some competition in the UK, management is hoping that new products will deepen the company’s relationship with the NHS. One example is EMIS-X Analytics, a system NHS Trusts can use to plan healthcare in local populations.

One downside is that this UK share isn’t generally cheap. EMIS currently trades on 22 times 2021 forecast earnings, which doesn’t leave much room for disappointment.

However, profit margins are high and the company has no debt. Even at the current valuation, the shares still support a useful 2.9% dividend yield.

Overall, I like the EMIS combination of repeat customers, ‘sticky’ embedded systems and steady growth. Profits have doubled over the last 10 years and the latest broker forecasts suggest earnings will return to growth this year.

I expect this UK share to be a long-term holding in my portfolio and plan to buy more over the coming months.

Where I’d look for dividend growth shares

With an eye on the future and trying to avoid value traps, I’d be tempted to take a long-term view on tech. Especially in light of the recent sell-off, especially in the US. It’s a tricky market to find value in, even here in the UK, but I do think more mature and profitable tech stocks, which are paying dividends, could be profitable investments.

Fundamentally, tech shares are often very scalable and have low fixed costs. This means they’re able to pay dividends as the companies move from an all out push for growth towards increasing their dividend payout. Another benefit I think is that over time many tech shares will grow their share prices as well. Investor demand for companies that combine income and growth potential won’t go away.

The trick I think is to find companies that are established, without paying too much for them. There’s little doubt that has become more difficult as tech share prices have risen.

Some examples of these types of shares

One example of a dividend growth share from the tech market would be Emis. It’s a major IT software supplier to the NHS and other healthcare bodies. In the first half of 2020, operating profits increased 38%, it produced loads of cash, and the interim dividend increased 3%.

Between 2015 and 2019, the dividend has gone from 21.2p to 31.2p. This slow and steady growth makes it ideal for creating a passive income. I expect that as it keeps growing, it will be able to keep increasing the dividend. Given the quality of the business, I don’t think the shares are expensive with a trailing price-to-earnings multiple of 20.

Another example of a share that might fit the criteria is Sanne Group, which also released positive interim results recently. The FTSE 250 financial company has lifted its interim dividend by 2.1%. This follows on from steady increases that saw the dividend more than double from 7p in 2015 to 14.10p in 2019.

I think the future looks bright for the company, with a positive outlook and the possibility to grow organically and via acquisition. I expect the share price, along with the dividend, should rise.

There are many examples of dividend growth shares from across the FTSE 350 and also on AIM. I think selecting ones with future potential is a great way to create a passive income, especially now many shares are cheaper following this year’s stock market crash.

EMIS Group is a leading provider of electronic patient record systems and software to GP practices, hospitals, pharmacies and healthcare centres.

Its adjusted operating profit for the period was £18.2m (2018 H1: £16.8m) and CEO Andy Thorburn called the results encouraging. Group revenue was up by 7% to £79.8m and recurring revenue by 1% to £60.2m, representing 76% of the firm’s total revenue.

Revenue growth was partly offset by investment in development costs for the new EMIS-X software platform. EMIS-X is currently being tested in-house but is expected to roll out during 2020 with an upgraded GP application in 2021.

EMIS Health

Is EMIS-X likely to save the NHS money? In the long term, I imagine it would, and if it works successfully, it will ensure EMIS continues to do well. However, I’m sceptical how seamlessly it will be implemented. Digitising the NHS is a massive undertaking.

The NHS IT system has been a bone of contention for everyone involved since the WannaCry cyber attack in 2018 and debate around NHS and IT has raged for longer than that. There’s no doubt patients, staff and the government would like to see a sophisticated, secure and efficient IT system in place. However, with so many people involved, complex needs to be met and costs to consider, this is no mean feat.

EMIS Group has so far proved a worthy contender for providing a long-term solution. It has a 57% share in the UK GP market and its revenue stream has gradually been improving year-on-year. The company is further developing its range of software solutions and recently won two new contracts to deploy its Symphony A&E software. It also received five new orders for its Online Consult triage service that allows patients to seek support or access self-help advice.

Brexit NHS debate

The ongoing debate about whether a post-Brexit trade deal between the UK and US could further expose the NHS to US companies is also a consideration. There are billion-dollar American companies specialising in medical IT, so could EMIS Group, with its £667m market cap, be a potential takeover target for them?

EMIS news

In other EMIS news, the group has submitted a bid for the English ‘GP IT Futures’ framework renewal process. It is confident of its chances, but this is also vital to continued progress, as the contract applies to over a quarter of EMIS revenues.

This AIM-listed company has earnings per share of 36p and a trailing price-to-earnings ratio of 29. This relatively high ratio suggests investors have already priced in future growth, but its debt ratio is low at 40% and analysts are forecasting an 8% increase in the EMIS Group share price.

Senior management seems to stick around, and most have been in their positions for several years or come with extensive and relevant experience, such as divisional CEO Suzy Foster who previously ran the Microsoft healthcare business for four years. I’ll be surprised if it doesn’t win its latest GP framework bid and consider EMIS a Buy for an income portfolio as it offers a reasonable dividend yield of almost 3%.

I wrote in January that Emis Group (LSE: EMIS) has been growing its revenue, normalised earnings, operating cash flow and the dividend for years. There’s a strong balance sheet with a pile of net cash and I reckon the company’s business has some decent defensive characteristics.

Good figures

Operations involve providing software and support services to GP practices, hospitals pharmacies, satellite healthcare centres and “across every major UK healthcare setting.”

And the market likes today’s full-year results report judging by this morning’s uplift in the share price of around 8% as I write.

The figures reveal overall revenue grew 6% during the year and recurring revenue lifted 5%. In terms of the adjusted numbers, net cash from operations moved 10% higher and earnings per share came in flat. The progress showed up on the balance sheet with the firm posting a 12% lift in net cash to £15.6m. This is a positive outcome extending the firm’s record. The directors expressed their approval, and confidence in the outlook, by pushing up the total dividend for the year by 10%.

Chief executive Andy Thorburn said in the report that revenue grew in all the firm’s key segments and much of it can be categorised as ‘recurring’, which I reckon adds to the defensive appeal of the business. The outcome was decent cash generation, which supports the progressive dividend policy and Thorburn thinks the firm is “well positioned” for future expansion.

Planning for growth

The company has been planning and investing for growth and, in 2018, “considerable management time” went into developing the strategy and attracting new talent to the business. The firm made 21 “key senior hires,” which sets it up well for 2019.

Back in January, with the share price around 897p, I said “I’d be happy to dip my toe in the water by buying a few of the company’s shares.” If I’d done so, today’s price close to 1,034p would be showing me a capital gain of just over 15%. However, I think there’s much more potential in Emis and I’d want to tuck some of the shares away for the long haul.

City analysts following the firm have pencilled in earnings increases of around 9% for this year and for 2020. The forward price-to-earnings ratio sits close to 19 two years out, and the predicted dividend yield is running a little under 3.2%. The valuation looks to be up with events, but I reckon the company is worth a premium because of the consistency of its results over several years. To me, Emis is worth keeping a close eye on with a view to buying some of the shares on dips and down-days with a view to holding onto them for the long haul.

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.

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.

Of course, success depends on whether the business has the wherewithal to recover from its troubles. The last thing you want to be doing is buying into a company that’s in terminal decline. With this in mind, I’m looking today at the outlook for unloved FTSE 100 stock BT (LSE: BT-A). I’ll come back to the telecoms giant shortly, after looking at a smaller company that’s already in recovery mode.

Isolated incident

UK leader in connected healthcare software and services Emis (LSE: EMIS) saw its shares crash from over 1,000p at the end of last year to a low of near 700p in February. This followed a review by the group’s new chief executive that identified a failure to meet certain service levels and reporting obligations relating its web product for GPs.

However, the shares began to recover after the company’s annual results in March. By then, the failures relating to the GP product looked very much like an isolated incident. Half-year results announced this morning have sent the shares 3% higher to 941p, as I’m writing.

Positive outlook

The company said it expects the settlement relating to the GP product will be within the £11.2m provision it announced in March. Meanwhile, an encouraging first-half performance saw net cash on the balance sheet at the period end of £32.3m, up from £14m at the end of December.

I’ve been impressed by the new chief executive and reckon the changes he’s made, including a strengthening of the senior leadership team, bode well for the future. As such, and with the perennial need of the NHS to manage costs and improve efficiency, I continue to rate the stock a ‘buy’. That’s despite a relatively high current-year forecast price-to-earnings (P/E) ratio of 20.7, and a fairly modest dividend yield of 2.9%.

Bargain buy?

The BT share price hit multi-year lows of not much above 200p earlier in the summer, and it remains relatively depressed at sub-220p. This gives a current-year forecast P/E of just 8.3, with a huge prospective 7% dividend yield.

My Foolish colleague Alan Oscroft recently wrote about some of the key issues facing BT. He identified net debt, a pension deficit and a wobbly-looking TV sports strategy. I view a net debt/equity ratio of 0.93 as not too scary, while the pension deficit should start to fall under an agreed payment plan. Now-rising interest rates are also likely to be helpful. Having said that, the financial position isn’t ideal and I wouldn’t be surprised to see the dividend reduced, if not in this financial year, then in the next.

Turning to the group’s businesses, I remain convinced BT has scale and competitive advantages in key areas that can drive a recovery under the right management. With this in mind, I view the installing of a new chairman late last year and the upcoming replacement of the chief executive this year in a positive light. I think BT might just prove to be a bargain buy at the current share price.

Aviva’s full-year results had my colleague Rupert Hargreaves asking whether Aviva could be the Footsie buy of the decade, and I share his enthusiasm. Since the resumption of progressive dividends, Aviva has been rapidly ramping up its annual cash payments, while still keeping them adequately covered by growing earnings.

And 2017 was no exception, with the insurance giant upping its dividend by a cracking 18% to 27.4p, for the fourth consecutive year of double-digit growth. The dividend, which yields 5.3% on the current share price, looks to be well supported by earnings, and by cash and liquidity.

Cash

Aviva saw cash remittances rising 33% to £2,398m, with general insurance net written premiums up 11% to £9,141m, and its Solvency II capital surplus improved to £12.2bn. I’m confident that I’m going to carry on receiving my annual dividends.

The firm’s strong cash generation also means it’s paying down debt, is in a strong position to make acquisitions when appropriate, and I think the more focused company presents considerably less risk than it did in the bad days of over-stretching. 

Crucially, I don’t think the reduced risk is yet fully factored into the share price, even bearing in mind that insurance is fundamentally a business built on risk. A forward P/E of only a little over nine, with forecast dividend yields heading above 6%, looks too cheap to me. I think I’ll be using this year’s dividend to buy more shares.

Recovery

I’m alway wary when I see a good dividend payer issue a warning which results in a share price fall, fearing that a cash shortfall and a dividend cut could be just around the corner.

Although a trading update from Emis Group (LSE: EMIS) in January looked solid and it reported a strong balance sheet, a worrying release the same day caused a share price crunch. The company, which specialises in healthcare software and services for GPs, hospitals and pharmacies, told us that its new chief executive had initiated a review of its customer and product support processes. And that it had uncovered “a failure to meet certain service levels and reporting obligations with NHS Digital, relating to the Group’s EMIS Web product for GPs in England.“

Fundamental failures of that nature can have a long-lasting impact, and a recovery to best practice can take some time. But an examination of Emis’s full-year results on Wednesday is convincing me that this has been a one-off problem and that there’s no real threat to the firm’s dividend.

One-off

Reported operating profit fell 55% to £10.6m, in line with expectations, but adjusted operating profit came in only 3% down at £37.4m. With operating cash generation up 17% to £44.4m, the dividend was lifted by an inflation-busting 10% to yield 3.2%.

Chief executive Andy Thorburn described the service failure as “a serious, but isolated incident.” He went on to assert that Emis continues “to lead the way in joined-up healthcare IT, with market-leading positions, high levels of recurring revenue and a strong financial position.“

House broker Numis Securities reckons the Emis share price has fallen too far — which we might expect them to. But I agree.

The review has identified a failure to meet certain service levels and reporting levels with NHS Digital. It relates to the company’s web product for GPs in England, with the findings having been fully disclosed to NHS Digital.

The financial impact of the issue is still unclear, as it has only just come to light. However, the company estimates that it could be in the upper single-digits of millions of pounds. With the firm having made a pre-tax profit of £25m in 2016, this is a sizeable amount for the business.

Improving trading

As well as the results of its review, EMIS also released a trading update for the 2017 financial year on Thursday. The company’s performance has been in line with expectations, excluding the potential losses from the aforementioned review. Full-year revenue was slightly ahead of the comparative period as it benefitted from growing recurring revenue, strong market shares and good momentum in its order books and pipelines.

Furthermore, the internal reorganisation programme has been completed, with a renewed focus on improving day to day operational management. With the company having a balance sheet which includes £14m of net cash, it appears to be in sound financial shape for the long run.

Recovery potential

With EMIS trading on a price-to-earnings (P/E) ratio of 16.3 even after today’s share price fall, its valuation appears to be high. Certainly, the business has growth potential, but this may be scaled back over the near term by the outcome of the review. As such, it may not be able to sustain its current valuation over the coming months, since investors may reduce their growth expectations for the business. This means that now may not be the right time to buy it for the long term.

Improving outlook

Also operating in the software and computer services industry is Iomart (LSE: IOM). The cloud specialist has a solid track record of earnings growth, with its bottom line rising at an annualised rate of 15% during the last five years. More growth is set to be delivered over the next couple of years, with the company’s bottom line due to rise by 13% next year, and by 9% in the following year.

With Iomart trading on a price-to-earnings growth (PEG) ratio of 1.4, it seems to offer excellent value for money. The company appears to be making encouraging progress with its strategy and when its consistent growth prospects are factored in, there could be scope for a higher rating over the medium term.

With dividends per share forecast to grow by 28% during the next two years, the stock has a forward yield of around 2.2%. This is from a dividend which is expected to be covered 2.6 times by profit. As such, more growth in shareholder payouts could be ahead.