EMIS Group (LSE:EMIS) saw its shares jump in June after a takeover bid was accepted. Let’s take a closer look at the details, as well as determine whether now would be a good time for me to buy the FTSE AIM shares for my holdings.
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.
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.
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Jabran Khan has no position in any of the 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.