Execution Noble initiates Craneware coverage with ‘buy’ recommendation ahead of results

Execution Noble initiated coverage of Craneware (AIM: CRW) with a “buy” rating today, commenting that while the US healthcare focused vendor was trading at a significant premium, the current share price scribed little value to new contract signings.

The company, which helps US hospitals automate billing and pricing procedures, has a business model that ensures high forward revenue visibility as its contracted revenues and renewals underpin over 80% of consensus FY2010 revenue estimates. A trading update released last month highlighted over 23% year on year revenue growth and 15% year on year increase in new contracts signed.

Execution said that Craneware’s market opportunity was in the increasing adoption of IT (information technology) in the US healthcare industry, estimating the addressable market at US$730 million, which it said was further underpinned by a hospital’s requirement to reduce costs by automating manual processes and maximize revenue generation through ensuring accurate reimbursements.

A large portion of this market remains under penetrated with about 60% of hospitals still relying on manual processes. The solutions directly address the reduction of paper base processed, that heavily contribute to administration and overhead spending, which accounts for about 25% of total healthcare expenditure. The software could also help hospitals meet the increasing regulatory and compliance requirements, added the stockbroker.

Other attractive fundamentals highlighted in the research report included limited near-term competitive threats as independent industry analyst KLAS has recently acknowledged Craneware’s products as number one in its category, while focus on innovation has helped it introduce products ahead of competition. This was confirmed by the company’s high renewal rates of 114% in 2009.

As of right now, Craneware’s customer base comprises about 1,000 hospitals, which have implemented 1.5 of its 5 available products on average, leaving room for cross-selling opportunities estimated at US$90 million by Execution.

In addition to that, the company’s partnership with McKesson has given it access to a significant customer base of 1,200 hospitals.

The expansion and cross selling opportunities could help Craneware improve margin and hit its EBITDA (earnings before interest, taxes, depreciation and amortisation) margin expansion target of 1%.

While shares in the company currently trade at a premium to its peers at 27x CY2010 P/E (price to earnings) indicating that most of the bullish points have already been priced in, Execution said that Craneware’s annuity revenue base was underappreciated with a significant latent potential offered by its customer base with long term contracts and high renewal rates.

The report estimated that the business could generate EBITDA margins of 40% based on FY2009 revenues and assuming annual renewals and no sales effort outside of the current customer base as well as no R&D (research and development) expenditure on new products. The value of the current annuity base alone was estimated at 261 pence per share. With FY2009 net cash of US$26 million increases the valuation to 333 pence, or 90% of the current share price, showing that new annuity contract signings and the cash flows they are set to generate in future are not adequately reflected in the valuation.

The current high renewal rates were projected to stay above 100% through 2013, while gross profits are expected to amount to US.3 million in 2011 compared to the 2010 estimate of US$24.1 million and the 2009 profit of US$21.6 million, increasing further to US$27.8 million in 2012 and US$28.7 million in 2013. Execution also said that the EBITDA margin would climb from 25.5% in 2009 to 41% this year and will remain at this level through 2014.

Shares in the company last traded at 376.5 pence.  http://www.proactiveinvestors.co.uk/companies/news/13532/execution-noble-initiates-craneware-coverage-with-buy-recommendation-ahead-of-results-13532.html