Allocate Software looks ideally positioned to benefit from NHS efficiency drive

Alistair Darling has declared that the government’s top priority is to reduce the budget deficit by cutting costs and ensuring greater efficiency within the NHS. The Chancellor recently stated that £26.5 billion of efficiency savings had been made at the NHS since 2004; however, cost-saving efforts have been stepped up over the last 12 months. 

The Conservatives are also committed to improving NHS efficiency if they win the general election this year, and this course of action has proven to be a boon for healthcare software providers, such as AIM listed Allocate Software (EPIC: ALL). Founded in 1991 as Manpower Software, the human resources software supplier has come a long way since it delivered its first version of its MAPS Software Suite to the Ministry of Defence in 1995. Since then, the fast-growing company that has expanded into the maritime, healthcare, education, construction and offshore oil industries in addition to opening offices in the US, Australia and Malaysia.

The London-based software supplier, which provides a “workforce optimisation” product to predominantly healthcare-focused clients, floated on the London Stock Exchange in 1998, transferring to the small cap Alternative Investment Market  (AIM) in 2002. The share price stands at 60.5p (at the time of writing) with a market cap of £27 million.

In May 2009, the group marked a new period of growth with a name change to Allocate Software and moved offices to Piccadilly. For the most part healthcare-focused, the group has outlined its corporate mission as providing software for a “better understanding of demand versus supply of clinical staff and how this is balanced against the efficient use of budgets and reduces the administrative burden for HR, clinical and payroll staff”.  Put simply, it supplies software to clients to help manage large, sophisticated and skilled workforces that work complex shifts.
In June, Allocate Software announced that it had won 12 new contracts in its fourth quarter ending 31 May 2009.

During the final three months of the financial year, the group reported record results, signing up seven NHS Trusts, taking the group’s total to 81, and one private healthcare provider for its staff roster software package. These deals brought the total number of contracts signed for its MAPS Healthroster product to 46 for the financial year 2009.

As well as winning new contracts within the healthcare sector, the company extended its contract with NATO in June for its MAPS Defence Suite. It has also managed to secure its second sale in Malaysia of its Healthroster product. The Penang Adventist Hospital contract signals geographic expansion and could lead to more orders as the hospital is part of a global network of some 400 not-for-profit hospitals, clinics and dispensaries.

The group’s Maritime division was also active, receiving an order for its MAPS Maritime Suite from offshore oil and gas company Maersk Oil Qatar, where it will be used to organise the shift patterns of its staff across platforms, drilling rigs, offshore accommodation vessels and storage vessels. The Maritime division is also set to build its share within the cruise sector with a new contract to provide crew rosters for some new vessels from the “world’s leading family entertainment company”.

While reduced IT spend has dealt a blow to the computer software and services sector, Allocate Software’s offering has remained attractive to its customers, and CEO Ian Bowles claims one of the reasons is that its MAPS software can deliver a return on investment in less than 12 months. In its latest results, the company revealed that pre-tax profits soared by more than a third to £2.5 million this year compared with £1.85 million in 2008. Its cash balances at year-end also stood at a healthy £3.7 million, even after shelling out £2.1 million on Baum Hart & Partners, a provider of software systems, consultancy, training and support services to the NHS,  in December 2008.

Bowles commented: "We continue to strengthen our position in the UK healthcare market, winning considerable  market share and securing our second private healthcare customer in Malaysia. In both Maritime and Defence we secured new orders, showing that even in difficult economic environments customers value  the applications we deliver."

The group still appears to be in acquisition mode as seen in December 2009 with the deal to buy Time Care, a Swedish provider with a similar focus, for £12.4 million gross. The Swedish company’s positive cash balances made the net consideration £8.7 million, which Allocate Software funded through a share placing raising £8.3 million (before expenses), with the balance satisfied from its existing cash pool.

This acquisition is indicative of the group’s expansion strategy of obtaining a substantial customer base through the acquisition of a local provider. Time Care enables the company to expand into the Nordic region, particularly in Sweden where Time Care has 200 clients, of which 57 are hospitals and 110 are Swedish  municipalities. Time Care is expected to be earnings enhancing within the first year of ownership off the back of pre-tax profits of £1 million on a turnover of £4.6 million in 2008.

As well as gaining entry into a new geographic market, the group could be set to benefit from cost savings to ongoing product development and support. Bowles expects there will also be opportunities to generate incremental revenues from cross-selling. The crux of the deal is Time Care’s self-rostering software product that enables employees to choose their own work rosters. Bowles says the self-rostering application is seen as a key addition to its workforce optimisation portfolio.

In November, the group also announced a strategic partnership with special strategic health authority NHS Professionals (NHSP), the largest provider of flexible staff managed services to the NHS.  This long-term NHSP partnership aims to cut down on the use of expensive agency staff within NHS Trusts, replacing them with cost-efficient, flexible staff. The partnership builds on Allocate Software’s work with the NHS whilst cementing its position within a defensive sector.

House broker Numis estimates that Allocate Software will generate £15.8 million of revenues in 2009, increasing to £17.7million and £18.6 million in 2010 and 2011. In its latest notes, the broker forecast that adjusted pre-tax profits will grow to £2.5 million this year then reach £2.7 million and £3.1 million over the next two years. Earnings per share came in at 5.1p, 5.7p and 4.7p in 2009, 2010 and 2011 respectively.