Hospital Digitalization And AI Adoption Will Drive Long-Term Upside Potential

Catalysts

About GPI

GPI develops and delivers healthcare software and related technology solutions for hospitals, laboratories, pharmacies and care providers globally.

What are the underlying business or industry changes driving this perspective?

• Acceleration of healthcare digitalization and automation, supported by public funding programs and the need to lower system wide costs, is likely to sustain demand for hospital information systems, telemedicine and diagnostics platforms and drive mid to high single digit revenue growth.
• Shift from project oriented, highly customized deployments to scalable global products in areas such as blood management, diagnostics and critical care should increase standardization, improve operating leverage and support a structurally higher EBITDA margin.
• Rising burden of chronic diseases and the push to move care out of hospitals into virtual and home based settings positions GPI's Care and telemonitoring platforms to capture higher recurring service and software maintenance revenues.
• Ongoing international expansion in France, DACH, the United States, Mexico and the Middle East, leveraging Evolucare and other acquisitions, can diversify the customer base beyond Italian public clients and enhance earnings resilience through higher margin private and export revenues.
• Investment in AI enabled features such as decision support, predictive triage and voice recognition, combined with consolidation of overlapping software platforms and centralized factories, should improve productivity, reduce unit delivery costs and expand net margins and free cash flow generation.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming GPI's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.0% today to 6.1% in 3 years time.
• Analysts expect earnings to reach €38.6 million (and earnings per share of €1.09) by about December 2028, up from €15.9 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 21.4x on those 2028 earnings, down from 30.2x today. This future PE is lower than the current PE for the IT Healthcare Services industry at 30.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.44%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Heavy dependence on large public tenders such as Consip and NRRP funded projects exposes GPI to political cycles, budget constraints and payment delays, which could create revenue volatility and strain operating cash flow and net income over time.
• The group is carrying a sizeable net financial position of around EUR 340 million and plans to fund ongoing CapEx and international expansion, so any slowdown in organic growth or margin expansion would make deleveraging harder and could pressure earnings and free cash flow.
• Execution risk in shifting from a project oriented model with multiple localized platforms to a global product and centralized factory structure may lead to integration challenges, higher-than-expected restructuring costs and delayed efficiency gains, weighing on EBITDA margin and EBIT growth.
• Ambitious international targets, including raising rest of world software revenues to around 30% and competing in markets such as the United States, France and the Middle East, increase exposure to stronger global players and regulatory complexity, which could limit pricing power and slow revenue growth.
• High and sustained investment needs in software, AI features, hospital assets and robotics, combined with conservative cash generation guidance and structurally slower paying public sector clients, may keep CapEx elevated and constrain improvements in free cash flow and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €18.57 for GPI based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €21.1, and the most bearish reporting a price target of just €16.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €629.5 million, earnings will come to €38.6 million, and it would be trading on a PE ratio of 21.4x, assuming you use a discount rate of 15.4%.
  
• Given the current share price of €16.58, the analyst price target of €18.57 is 10.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.