Share tips: Healthy outlook for NHS software specialist

Since 1996 the NHS budget has roughly tripled and employee numbers have risen to 1.7 million. No wonder staff rostering software specialist Allocate Software posted record revenues for the sixth year in a row in August. As the European market leader in the healthcare workforce market, it provides software and services that help make nurses' and doctors' schedules more efficient.

Currently, 262 NHS trusts and 95 overseas customers use the system. Contract renewal rates for support remain at near 100%. So recurring revenues represent 42% of turnover (up 10% to £36.6m) for the year to May 2012. There's plenty of scope to expand further too, since almost a third of all NHS trusts still don't use an e-rostering system. Growth can therefore still come from new clients and/or cross-selling initiatives, where Allocate wins approximately 80% of all the bids it submits.

Allocate has also just acquired RealTime Health, a British supplier of patient flow management software to the NHS, in a £7.2m deal. This software optimises the use of beds in hospitals, tracking a patient's progress towards a planned discharge date. It's designed to reduce a patient's length of stay, helping hospital trusts to improve efficiency by caring for more people using the same or lower levels of resource.

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Alongside its British operations, Allocate serves customers in another ten countries, including Sweden, Malaysia, America, New Zealand and Australia. Its software can also be deployed by thearmed forces customers include the Ministry of Defence, Nato and the special forces.

Allocate Software (Aim: ALL), rated a BUY by Numis Securities

House broker Numis is predicting turnover and underlying earnings per share (EPS) of £39.2m and 7.4p respectively for the year ending May 2013. That puts the stock on a price/earnings (p/e) ratio of ten. I would rate the company at ten times its EBITDA multiple. Adjusting for £4.3m of net cash that suggests an intrinsic worth of 105p per share.

As for risks, the biggest is the possibility of the government slashing NHS frontline services in a bid to save money. Allocate is also exposed to political interference, foreign-currency and smaller-company cash-flow risk.

However, with attractive prospects and strong barriers to entry, I won't be too surprised if this relative minnow is snapped up by a much bigger IT player. Numis Securities has a 100p price target.

Rating: BUY at 74p (market cap £48m)

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI, or phone 020-7633 3634 for more information.