Share tip of the week: direct-to-GP software provider

Health Secretary Andrew Lansley is planning reforms in the NHS that will hand much more spending control over to general practitioners in the next few years. Paul Hill tips a software firm that looks likely to receive a boost from the reform.

By Paul Hill

published 23 July 2010

in Features

The last government managed to improve the NHS. But it came at a huge cost. The department's budget has ballooned from £40bn in 1996 to £120bn today. Waiting lists have fallen, but there's a huge amount of red-tape stifling front-line services.

Andrew Lansley, the health secretary, plans to deliver £20bn in savings over the next few years, partly by abolishing health authorities and primary care trusts, and handing control of £70bn of expenditure to GPs instead. This would eliminate 20,000 management positions, and move decision-making on treatments to those closest to the patient.

Enter EMIS. This £195m market cap (at 325p) firm floated on Aim in March at 300p a share. It is the UK's top supplier of software to GP practices. The system allows users to manage patient records electronically, as well as prescribe medicines and arrange appointments, covers 39 million people, and has a dominant 52% share of the sector, ahead of rivals InPS (20%) and iSoft (10%).

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EMIS was founded in 1987 by two doctors, a key reason behind its success. These guys have used their industry knowledge to develop an IT application that hits all the right buttons with doctors. Better still, EMIS has done this outside the National Programme for IT, which the National Audit Office has criticised for wasting £12.7bn. So the firm looks well placed to capitalise on Lansley's plans. The group is rolling out a new clinical web-based product that should revolutionise what GPs can do over the next decade. It not only provides universal coverage of a patient's medical record, but also offers huge efficiencies through its hosted 'software-as-a-service' model.

EMIS (Aim: EMIS), rated BUY by Evolution Securities

House broker Evolution expects 2010 turnover and underlying cash profits (Ebitda) of £58.6m and £19.5m, rising to £63.7m and £22.3m in 2011. That puts the stock on enterprise value and Ebitda multiples of 9.6 and 8.4. Net cash is £10.4m, while 64% of customers have been with the business for more than ten years, giving excellent earnings visibility.

So what are the potential banana skins? The City's big worry is what happens to the NHS in general, and whether there will be any fallout from government cost-cutting. By working right at the 'pinch point' of the reforms, EMIS could become more exposed to political interference. But with strong barriers to entry, I wouldn't be surprised if this minnow was snapped up by a bigger rival. Evolution has a 459p price target. Interims are set for 14 September.

Recommendation: BUY up to 375p

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.