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Is EMIS plc a falling knife to catch after today’s 20% slump?

Connected healthcare and services provider EMIS (LSE: EMIS) has fallen by as much as 20% today after it announced the results of a review of customer and product support processes.

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.

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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.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Emis Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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