Allocate Software: Update

Allocate has confirmed that full year results are expected to be in line. While the large win with the Australian Defence Force was a major factor in the H2 uplift, helped by a broadened product offering, demand within healthcare appears to have remained robust. For 2013 we see plenty of scope for earnings growth through cross-selling, a new platform rollout and licence extensions in the NHS. We see the shares as at least 20% undervalued.

Review Of Progress
In a trading update, Allocate has confirmed that full year results are expected to be in-line. Our estimates assume 20% sales growth (6% organic) over the full year, with sales and profitability being particularly H2 weighted due to the contribution from the multi-million deal with the Australian Defence Force. Reaffirming our view that the ‘spend to save’ nature of Allocate’s solutions would stand the company in good stead, appetite from the NHS is said to have remained strong. Both of H1’s acquisitions, Zircadian and RosterOn, are said to be performing in line. Health Assure has also made its first sale to Clinical Commissioning Group, indicating that the company is starting to regain customers lost following the dissolution of the PCTs.

Platform For Growth Looks Sound
Our 2013 estimates are unchanged. We see good scope for sales growth through cross-selling the enlarged portfolio. Within the NHS Allocate is the dominant supplier of rostering software (supplying c 45% of trusts), and now supplies over 90% of trusts with at least one product. In particular, the addition of doctor rostering capability through the Zircadian acquisition significantly enlarges Allocate’s addressable market. The rollout of HealthRoster V10, a completely new version of the core healthcare software platform, should help competitiveness and also benefit margins through enabling new features to be implemented more quickly and cost effectively. Longer term, the multi-lingual capability should facilitate further geographical expansion.

Valuation: Track Record And Opportunity Unrewarded
Allocate’s 2013 P/E of 9.9x is a 20% discount to most healthcare software peers. We do not believe this is merited considering the company’s track record, market position and scope for growth. The EV/sales ratio of 1x compares to peers at 1.7x (ACS) and 4.3x (EMIS). While this reflects the company’s lower forecast margins than peers, with the roll-out of HealthRoster V10 and acquisitions being integrated, we see plenty of scope for EBIT margins to expand beyond the 17% we have forecast for 2013.

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