Cloud EHR Adoption And AI Tools Will Sustainably Shape Long-Term Earnings Trajectory

Catalysts

About Carasent

Carasent provides cloud based healthcare software, focusing on EHR platforms and adjacent digital services for clinics in the Nordics and Germany.

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

• Although the shift from legacy on premise systems to cloud based EHRs in Germany is a structural growth driver, the slow pace of adoption and the need to prove Webdoc X in pilots could delay clinic migrations and keep ARR growth at the lower end of management’s ambitions. This could limit operating leverage and EBITDA expansion.
• While AI supported documentation tools like Medsum address a clear need to reduce clinician admin time, the complexity of medical note structures and the requirement for intensive onboarding may constrain uptake and pricing power. This may cap incremental revenue and delay contribution to net margins.
• Despite multi year product investments in modules such as surgery, Advoca and HPI, the inherently long sales and implementation cycles in healthcare mean that cross sell and upsell potential may be realized more slowly than expected. This could flatten net revenue retention and earnings growth versus earlier years.
• Even though regulatory driven upgrades such as Germany’s security changes and Sweden’s NLL prescription requirements create recurring project work, the intermittent and lumpy nature of these revenues, combined with associated COGS, could keep total top line growth volatile and limit visibility on near term EBIT improvements.
• While Carasent has demonstrated strong cost control and scalable opex, the planned step up in sales and marketing investments, particularly in Germany, may be required for longer than anticipated to gain reference customers. This would likely suppress margin expansion and keep earnings growth more modest than the underlying ARR growth profile suggests.

Assumptions

This narrative explores a more pessimistic perspective on Carasent compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Carasent's revenue will grow by 12.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -5.7% today to 22.4% in 3 years time.
• The bearish analysts expect earnings to reach SEK 105.2 million (and earnings per share of SEK 1.45) by about December 2028, up from SEK -18.6 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SEK122.4 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.2x on those 2028 earnings, up from -98.1x today. This future PE is lower than the current PE for the GB Healthcare Services industry at 55.3x.
• The bearish analysts expect the number of shares outstanding to decline by 3.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.24%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Continued double digit ARR growth of 16% organically, supported by 111% net revenue retention and more than 90% recurring revenue, could compound over several years and drive higher valuation multiples as investors reassess the durability of revenue and earnings growth.
• The large pipeline of long running development projects now entering commercial rollout, including Webdoc X in Germany, the surgery module, Medsum, Advoca and the enhanced HPI platform, may translate into new addressable segments and upsell opportunities that accelerate revenue and expand net margins over the long term.
• Successful execution of major implementations such as Volvat and recurring security upgrade projects like Data AL in Germany could unlock both high margin recurring subscription income and sizeable consultancy revenue spikes, lifting near term earnings and improving operating leverage beyond current expectations.
• Disciplined cost control, evidenced by converting roughly 82% of incremental revenue into EBITDA and keeping the core cash cost base broadly flat despite growth and inflation, may sustain structurally higher EBITDA margins and faster profit growth than implied by a flat share price outlook.
• Strategic reinvestment of strong cash generation into targeted sales and marketing, particularly in Germany where legacy on premise EHR systems from the 1990s are being replaced by cloud solutions, could lead to meaningful market share gains and rising earnings power that support a higher long term equity valuation.

Valuation

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

• The assumed bearish price target for Carasent is SEK25.27, which represents up to two standard deviations below the consensus price target of SEK32.09. This valuation is based on what can be assumed as the expectations of Carasent's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK39.0, and the most bearish reporting a price target of just SEK25.27.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be SEK470.8 million, earnings will come to SEK105.2 million, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of SEK26.1, the analyst price target of SEK25.27 is 3.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.