Ergomed — Adj EBITDA upgrade despite industry challenges

Ergomed (AIM: ERGO)

Last close As at 27/03/2024

1,042.00

−16.00 (−1.51%)

Market capitalisation

529m

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Research: Healthcare

Ergomed — Adj EBITDA upgrade despite industry challenges

H120 adjusted EBITDA of £9.1m was the main positive surprise for us in Ergomed’s full interim report released today. We have increased our adjusted EBITDA forecasts to £18.3m (up 8.6%) in 2020 and £20.1m (up 6.8%) in 2021. A strong order book (£151.4m, up 22.0% from the end of 2019) with high visibility into 2021, continued overall business growth and a strong balance sheet should allow Ergomed to successfully navigate the COVID-19 pandemic, invest in organic growth and look for potential strategic acquisitions. Our valuation is upgraded to £409m or 845p/share.

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Healthcare

Ergomed

Adj EBITDA upgrade despite industry challenges

H120 interim report

Healthcare services

22 September 2020

Price

690p

Market cap

£334m

Net cash (£m) at end June 2020

14.1

Shares in issue

48.4m

Free float

78%

Code

ERGO

Primary exchange

AIM

Secondary exchange

Frankfurt (Xetra)

Share price performance

%

1m

3m

12m

Abs

10.4

64.3

139.6

Rel (local)

14.2

76.8

198.9

52-week high/low

705p

280p

Business description

Ergomed is a global full-service contract research outsourcing business with a core focus on the US and EU. It provides Phase I–III clinical services in addition to post-marketing pharmacovigilance (Phase IV) services through its PrimeVigilance division. The company is predominantly focused on oncology, orphan drugs, rare diseases and pharmacovigilance.

Next event

H220 trading update

January 2021

Analyst

Dr Jonas Peciulis

+44 (0)20 3077 5728

Ergomed is a research client of Edison Investment Research Limited

H120 adjusted EBITDA of £9.1m was the main positive surprise for us in Ergomed’s full interim report released today. We have increased our adjusted EBITDA forecasts to £18.3m (up 8.6%) in 2020 and £20.1m (up 6.8%) in 2021. A strong order book (£151.4m, up 22.0% from the end of 2019) with high visibility into 2021, continued overall business growth and a strong balance sheet should allow Ergomed to successfully navigate the COVID-19 pandemic, invest in organic growth and look for potential strategic acquisitions. Our valuation is upgraded to £409m or 845p/share.

Year end

Revenue (£m)

Adj. EBITDA*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/18

54.1

2.3

1.9

0.0

N/A

N/A

12/19

68.3

12.5

19.8

0.0

30.9

N/A

12/20e

84.1

18.3

23.8

0.0

29.0

N/A

12/21e

96.6

20.1

27.5

0.0

25.0

N/A

Note: *Adj. EBITDA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Adjusted EBITDA estimate increased

H120 revenue numbers were released with the trading update in July 2020, which we reflected in our last update. H120 gross profit increased to £18.5m from £14.5m, with gross margin improving to 45.8% from 41.2%. H120 adjusted EBITDA increased to £9.1m, up from £6.5m in H119. We fine-tuned our expectations and now forecast total revenue of £84.1m (down 1.8% vs previous estimate) in 2020 mainly due to lower pass-through revenues due to COVID-19 pandemic. We slightly raised our PrimeVigilance (PV) segment revenue forecasts but take a more cautious view on the contract research outsourcing (CRO) segment as the COVID-19 pandemic enters the winter season. Better-than-expected H120 adjusted EBITDA led us to upgrade our estimate to £18.3m (up 8.6%) in 2020.

Resilient combination of PV and CRO businesses

Ergomed has proved to be a resilient business, which we attribute to a diversified and well-balanced pharma services offering (pharmacovigilance and CRO). Widespread lockdowns inevitably caused disruptions to the clinical drug development industry; however, demand for pharmacovigilance services remained high. Gross margins across Ergomed’s PrimeVigilance and CRO businesses are roughly similar once pass-through costs have been accounted for. As a result of this well-balanced services offering, Ergomed was able to successfully navigate the disruptions caused by the pandemic.

Valuation: £409m or 845p/share

We have refined our peer group valuation methodology. While 2020 and 2021 EV/EBITDA multiples of the broader peer group have contracted 15% and 8% since our last update in July, the market continues to attach a premium to growth stocks. As a result, we believe a better comparison is Medpace, which is has a comparable EV and growth rate and trades at a c 20% premium to the sector average. Applying the same 20% premium to peer multiples we upgrade our valuation to £409m or 845p/share from £345m or 713p/share previously. The H220 trading update should be released in January 2021, as usual.

Strong order book implies high revenue visibility

Ergomed’s total H120 revenues increased to £40.4m, up 14.8%, while underlying service fee revenue, which exclude pass-through costs billed to clients, grew by 25.9% (to £36.9m). Like-for-like service fee revenue grew by 18.0% (excluding H120 revenue from the recently acquired PrimeVigilance USA, pass-through revenues and H119 one-off income of £1.6m).

The growth drivers were the strong order book at the beginning of the year and significant new business won. The order book grew to £151.4m (a record high), up 22.0% from the last reported figure (at the end of FY19) and up 28.0% y-o-y. This provides high visibility for the remainder of 2020 and 2021. Sales of new business increased to £60.2m, up 22.9% y-o-y, which led to a strong period book-to-bill ratio of 1.49x versus 1.22x in FY19. Ergomed indicated new business was won across both segments, including within the newly acquired PrimeVigilance USA.

Adjusted EBITDA increased by 40% in H120 to £9.1m versus £6.5m in H119. Notably, adjusted EBITDA in H119 was boosted by a total of £2.5m one-offs (£0.9m due to new leasing standard IFRS 16 and £1.6m due to the adoption of IFRS 15) meaning in effect that underlying EBITDA has more than doubled.

Net cash was £14.1m at end-H120 versus £14.3m at end-FY19. The strength of H120 cash flow was shown by the fact that cash balances were back up to the start of year position, after paying £8.1m for the PrimeVigilance USA acquisition and associated costs. Reported cash and cash equivalents at end-H120 were £29.1m, which included debt of £15m drawn down as a precautionary measure at the beginning of the pandemic. Due to strong cash generation in H120, however, the debt remained unutilised and was fully repaid in August. Ergomed continues to be debt free, but still has access to facilities of £30m. The company expressed interest in further bolt-on acquisitions to grow the business. Due to the ongoing pandemic, which complicates the due diligence process, we believe new acquisition is less likely in the very near term, but continued growth of existing business, the strong balance sheet and access to debt position Ergomed very well to consider further inorganic growth opportunities.

CRO: Well-managed impact from COVID-19

As expected, the COVID-19 restrictions affected the CRO industry. Ergomed’s H120 CRO underlying service fees decrease to £11.1m, down 6.7% y-o-y. Total CRO segment revenues on a reported basis decreased to £14.3m, down 24.7% (however, this takes into account pass-through revenues, which are billed to clients, and the inclusion of the £1.6m one-off income in H119).

With its H120 interim report Ergomed said the COVID-19-related impact was ‘due to some delays on a small number of studies, however the majority of projects were largely unaffected thanks to the focus on essential research in rare disease and oncology’. The company responded by focusing on cost control, which enabled it to maintain margins. Ergomed also reported that COVID-19 restrictions were beginning to ease towards the end of H120 and into H220.

PrimeVigilance segment outperforms; US business doubles

Revenues in the PrimeVigilance segment increased to £26.1m, up 62.1% y-o-y. This includes the PrimeVigilance USA business (formerly Ashfield Pharmacovigilance) acquired in January 2020. The integration of the PrimeVigilance USA business was completed rapidly and successfully. As a result, Ergomed’s US PV business doubled in H120 to £14.4m from £7m in H119. New awards were won in H120 as well. If excluding the acquisition, comparable PrimeVigilance segment revenues grew 36.0% y-o-y.

Ergomed reported an increased demand for its PV services during the COVID-19 pandemic. It managed to absorb this additional work with existing capacity without increasing headcount, which led to strong margins.

Estimate changes: Adjusted EBITDA upgraded

H120 gross profit increased to £18.5m from £14.5m, with the gross margin improving to 45.8% from 41.2%. SG&A costs were £11.3m versus £9.2m a year ago. This led to H120 adjusted EBITDA of £9.1m, up from £6.5m in H119. Net profit came in at £4.3m versus £3.6m in H119.

Revenues were released with the trading update in July 2020, which we reflected in our last update. With the H120 report released, we further fine-tuned expectations and now forecast total revenues of £84.1m (down 1.8% vs previous estimate) and £96.6m (down 3.9% vs previous estimate) in 2020 and 2021, respectively. This mainly reflects COVID-19 pandemic-related reduced pass-through revenues in the CRO business. We slightly upped our PV segment revenue estimates but took a more cautious view on the CRO segment revenues as the COVID-19 pandemic enters the winter season and effective management measures, such as a vaccine, are still in development.

Better-than-expected H120 adjusted EBITDA of £9.1m was the main positive surprise for us. We have upgraded our adjusted EBITDA forecasts to £18.3m (up 8.6%) and £20.1m (up 6.8%) in 2020 and 2021, respectively. Our adjusted EBIT and EPS forecasts are lower mainly due to upward adjustments in depreciation and amortisation.

We have refined our peer group valuation methodology. While 2020 and 2021 EV/EBITDA multiples of the broader peer group have contracted 15% and 8% since our last update in July, the market continues to attach a premium to growth stocks. As a result, we believe a better comparison is Medpace, which is of a comparable EV and growth rate and trades at a c 20% premium to the sector average. Applying the same 20% premium to peer multiples to Ergomed, we upgrade our valuation to £409m or 845p/share from £345m or 713p/share previously

Exhibit 1: Key changes to forecasts

£m

FY19

FY20e

FY21e

Actual

Old

New

Change (%)

Old

New

Change (%)

Total revenues

68.3

85.7

84.1

-1.8

100.5

96.6

-3.9

– PrimeVigilance

35.4

53.6

54.1

0.9

58.4

62.5

6.9

– CRO

32.8

32.1

30.0

-6.5

42.1

34.1

-18.9

O/W pass-through

8.5

6.7

6.6

-1.7

8.8

8.1

-7.7

Adjusted EBITDA

12.5

16.9

18.3

8.6

18.8

20.1

6.8

Adj. EBITDA margin

18.3%

19.7%

21.8%

2.1pp

18.7%

20.8%

2.1pp

Adjusted EBIT

8.8

15.4

14.2

-8.1

17.3

16.4

-5.4

Adj. EBIT margin

12.9%

18.0%

16.8%

-1.2pp

17.2%

17.0%

-0.3pp

Adjusted EPS (p)

19.8

27.7

23.8

-14.2

29.8

27.5

-7.6

Source: Ergomed H120 trading update, Edison Investment Research. Note: Adjustments mainly exclude share-based payments.

Exhibit 2: Comparable companies

EV ($m)

EV/EBITDA (x)

EV/sales (x)

P/E (x)

P/book (x)

FY20e

Syneos Health

8,218

13.33

1.82

16.92

1.87

PRA Health Sciences

7,613

16.53

2.46

23.33

5.40

ICON

9,284

20.78

3.42

28.83

5.99

Medpace

3,992

21.61

4.42

29.64

5.26

Average

7,277

18.06

3.03

24.68

4.63

FY21e

Syneos Health

8,218

11.56

1.63

14.09

1.71

PRA Health Sciences

7,613

13.37

2.22

18.05

4.59

ICON

9,284

17.37

3.05

23.38

5.55

Medpace

3,992

18.26

3.61

25.71

4.53

Average

7,277

15.14

2.63

20.31

4.10

Source: Refinitiv. Note: Prices at 18 September 2020.

Exhibit 3: Financial summary

Accounts: IFRS, year-end 31 December (£000s)

2017

2018

2019

2020e

2021e

INCOME STATEMENT

 

 

 

 

 

Total revenues

47,624

54,112

68,255

84,149

96,591

Cost of sales

(22,398)

(26,788)

(29,790)

(38,226)

(44,942)

Reimbursable expenses

(7,609)

(8,070)

(8,940)

(7,343)

(9,027)

Gross profit

17,617

19,254

29,525

38,580

42,622

Gross margin %

37%

36%

43%

46%

44%

SG&A (expenses)

(19,784)

(28,152)

(23,513)

(24,439)

(27,001)

R&D costs

(2,689)

(1,578)

(545)

(199)

(203)

Other income/(expense)

952

30

51

(233)

0

Exceptionals and adjustments

5,062

10,165

3,265

466

976

Reported EBITDA

(2,278)

(7,912)

9,230

17,858

19,092

Depreciation and amortisation

1,626

2,534

3,712

4,149

3,674

Reported EBIT

(3,904)

(10,446)

5,518

13,709

15,418

Finance income/(expense)

(543)

(599)

(245)

(360)

(240)

Other income/(expense)

0

277

(286)

(686)

0

Reported PBT

(4,447)

(10,768)

4,987

12,663

15,178

Income tax expense (includes exceptionals)

(57)

(89)

583

(1,687)

(3,036)

Reported net income

(4,504)

(8,980)

5,570

10,976

12,143

Basic average number of shares, m

41.1

44.7

46.6

48.1

48.4

Basic EPS (p)

(11.0)

(20.1)

12.0

22.8

25.1

 

Adjusted EBITDA

2,784

2,253

12,495

18,324

20,068

Adjusted EBIT

1,158

(281)

8,783

14,175

16,394

Adjusted PBT

1,782

960

8,637

13,118

16,354

Adjusted EPS (p)

4.2

1.9

19.8

23.8

27.5

Adjusted diluted EPS (p)

4.2

1.9

19.8

22.5

26.3

Order book

88,200

109,200

124,100

169,404

218,349

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

Property, plant and equipment

1,078

1,344

1,110

428

418

Right-of-use assets

-

-

5,171

5,630

5,630

Goodwill

15,269

13,659

13,380

17,895

17,895

Intangible assets

20,229

3,740

2,755

4,508

4,308

Other non-current assets

2,367

2,646

2,616

3,184

3,184

Total non-current assets

38,943

21,389

25,032

31,645

31,435

Cash and equivalents

3,218

5,189

14,259

22,189

34,164

Trade and other receivables

16,807

16,429

14,359

19,354

22,574

Other current assets

2,945

3,857

5,665

4,957

4,957

Total current assets

22,970

25,475

34,283

46,500

61,694

Lease liabilities

0

0

3,716

4,015

4,015

Long term debt

0

0

Other non-current liabilities

13,201

1,314

635

1,149

1,149

Total non-current liabilities

13,207

1,314

4,351

5,164

5,164

Trade and other payables

10,717

10,989

10,373

13,744

16,585

Lease liabilities

0

0

1,718

2,000

2,000

Other current liabilities

3,134

6,192

6,053

7,237

7,237

Total current liabilities

13,863

17,187

18,144

22,981

25,822

Equity attributable to company

34,843

28,363

36,820

50,001

62,143

 

 

 

 

 

CASH FLOW STATEMENT

 

 

 

 

Profit before tax

(4,447)

(10,768)

4,987

12,663

15,178

Cash from operations (CFO)

70

1,044

11,788

16,481

15,438

Capex

(1,425)

(1,587)

(996)

(650)

(3,474)

Acquisitions & disposals net

(1,932)

(398)

(107)

(7,589)

10

Other investing activities

(559)

(751)

(1,728)

0

0

Cash used in investing activities (CFIA)

(3,916)

(2,736)

(2,831)

(8,232)

(3,464)

Net proceeds from issue of shares

2,676

3,790

1,427

0

0

Movements in debt

10

(12)

(1,677)

0

0

Other financing activities

(2)

(4)

0

(1,210)

0

Cash from financing activities (CFF)

2,684

3,774

(250)

217

0

Increase/(decrease) in cash and equivalents

(1,162)

2,082

8,707

8,466

11,974

Currency translation differences and other

(44)

(111)

363

(536)

0

Cash and equivalents at start of period

4,424

3,218

5,189

14,259

22,189

Cash and equivalents at end of period

3,218

5,189

14,259

22,189

34,164

Net (debt) cash

3,218

5,189

14,259

22,189

34,164

Source: Ergomed accounts, Edison Investment Research

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This report has been commissioned by Ergomed and prepared and issued by Edison, in consideration of a fee payable by Ergomed. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This report has been commissioned by Ergomed and prepared and issued by Edison, in consideration of a fee payable by Ergomed. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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