Ascribe profits from local control

To say that investors in healthcare IT have had a rough time this year is something of an understatement. Many ventures have quite simply failed to deliver and the most high profile business, iSoft, is mired in controversy after its involvement in a (once lucrative) ten-year project to upgrade National Health Service computer systems came unstuck. Independent auditors are investigating its books and the shares have crashed by 90 per cent.

Of course, the problem with large, centralised projects such as the ‘National Programme for IT’ is that, although they promise huge revenues and very healthy margins at the outset, ‘big Government’ bureaucracy means they are usually prone to delays.

In some respects, it’s often far better to deal with local organisations that are in charge of their own budgets. That is what healthcare software business Ascribe has been doing.

Ascribe joined AIM almost two years ago, after the company placed 27.8 million shares at 18p each. Today, the shares trade for more than double that, but the business’ very strong earnings growth suggests they have further to go.

Ascribe develops healthcare applications that it sells to the NHS, and to health organisations in Australia, Hong Kong, Malaysia and New Zealand. These applications are tailored for different parts of a local healthcare system: pharmacies, GP surgeries, emergency departments and community care bodies (such as child care facilities and mental health units).

One of its solutions for pharmacies is an application that allows the electronic prescription of medication. This paperless system uses decision support software to reduce errors that can result from incorrect dosing or patient allergies.

But what should most interest potential investors is that Ascribe sells its systems to local NHS Trusts, which have discretionary budgets. So, although Ascribe’s applications are ‘Connecting for Health’-compliant, they are not dependant upon the National Programme for IT.

In fact, Ascribe’s house broker Cenkos Securities believes that the failure of the National Programme’s software providers to deliver a product represents an opportunity for Ascribe, as more and more NHS Trusts become impatient for IT solutions that work. The market opportunity for companies like Ascribe is a potential £6 billion over the next five years.

The company’s recent AGM statement revealed that the current financial year’s first quarter (which ended on 30 September) saw it continue to win market share, with orders being larger than anticipated. Executive chairman Stephen Critchlow pointed out that recent acquisitions by the business had seen cross-selling opportunities that are ‘already contributing significantly to Ascribe’s growth’.

The latest forecasts from Cenkos estimate that sales will increase to £16.8 million in 2007, from £9.9 million in the year to 30 June 2006, while adjusted pre-tax profits are expected to grow 59.1 per cent to £3.5 million. Earnings per share should come in 46 per cent higher at 2.2p.

In 2008, sales are set to increase by a further 13.7 per cent to £19.1 million as pre-tax profits grow to £4.3 million, translating to EPS of 2.6p.

With the share price currently trading at around 15 times 2008’s earnings, we think Ascribe represents good value. Buy.