Ergomed — Diversified services offering proves resilient

Ergomed (AIM: ERGO)

Last close As at 23/04/2024

1,042.00

−16.00 (−1.51%)

Market capitalisation

529m

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Research: Healthcare

Ergomed — Diversified services offering proves resilient

According to Ergomed’s H120 trading update, the business successfully navigated the COVID-19 pandemic in H120. Underlying revenues in the PrimeVigilance segment grew 36.0% (or 62.1% including the recent acquisition), while the CRO segment, unsurprisingly, saw a modest decline as a result of the widespread lockdowns. The growth prospects, however, remain intact in our view. Ergomed has proved to be a resilient business, which we attribute to a diversified and well-balanced pharma services offering (pharmacovigilance and CRO). Strong H120 sales and a record order book at 30 June 2020 should see Ergomed carry its strong momentum into 2020 and beyond. Net positive revisions to our estimates and a material expansion of peer multiples has led to a significant upgrade to our valuation to £345m or 713p/share.

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Healthcare

Ergomed

Diversified services offering proves resilient

H120 trading update

Healthcare services

23 July 2020

Price

600p

Market cap

£290m

Net cash (£m) at end-June 2020

14.1

Shares in issue

48.3m

Free float

67%

Code

ERGO

Primary exchange

AIM

Secondary exchange

Frankfurt (Xetra)

Share price performance

%

1m

3m

12m

Abs

46.3

37.9

85.8

Rel (local)

47.3

27.3

121.6

52-week high/low

605p

280p

Business description

Ergomed is a global full-service contract research outsourcing (CRO) 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 events

H120 results

September 2020

Analyst

Dr Jonas Peciulis

+44 (0)20 3077 5728

Ergomed is a research client of Edison Investment Research Limited

According to Ergomed’s H120 trading update, the business successfully navigated the COVID-19 pandemic in H120. Underlying revenues in the PrimeVigilance segment grew 36.0% (or 62.1% including the recent acquisition), while the CRO segment, unsurprisingly, saw a modest decline as a result of the widespread lockdowns. The growth prospects, however, remain intact in our view. Ergomed has proved to be a resilient business, which we attribute to a diversified and well-balanced pharma services offering (pharmacovigilance and CRO). Strong H120 sales and a record order book at 30 June 2020 should see Ergomed carry its strong momentum into 2020 and beyond. Net positive revisions to our estimates and a material expansion of peer multiples has led to a significant upgrade to our valuation to £345m or 713p/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

85.7

16.9

27.7

0.0

21.7

N/A

12/21e

100.5

18.8

29.8

0.0

20.1

N/A

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

Good order book growth, high revenue visibility

Total H120 revenues increased to £40.4m, up 14.8%, while underlying service fees grew by 18.0% (excludes revenue from the recently acquired PrimeVigilance USA, pass-through revenues and H119 one-off revenues of £1.6m). 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 vs 1.22x in FY19. Ergomed indicated that new business was won across both segments, including within the newly acquired PrimeVigilance USA. Order book growth was therefore strong as well, to £151.4m, up 22.0% from the last reported figure (end FY19) and up 28.0% y-o-y. This provides high visibility for the remainder of 2020 and 2021.

PrimeVigilance segment outperforms

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, which is now fully integrated. Excluding that the comparable PrimeVigilance revenues grew 36.0% y-o-y. Modest disruption from the pandemic resulted in a decrease in H120 CRO underlying service fees to £11.1m, down 6.7% y-o-y. Total CRO segment revenues decreased to £14.3m, down 24.7% (taking into account pass-through revenues and the inclusion of the £1.6m one-off revenue in H119). Pass-through costs are billed to clients.

Valuation: £345m or 713p/share

We value Ergomed at £345m or 713p/share, compared to £186m or 399p/share previously. This is a result of net positive revisions of our estimates, but more significantly substantial peer multiple expansion (Exhibit 2 vs last published in the initiation report). Ergomed indicated that FY20 EBITDA will be ‘materially ahead of current market expectations’. Full audited interim results will be released in September 2020, which is when we will revise our estimates in detail.

H120 trading update: FY20 EBITDA ‘to be materially ahead of current market expectations’

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 and is now guiding FY20 EBITDA ‘to be materially ahead of current market expectations’.

Cash was £14.1m at end-June 2020 (no debt) vs £14.3m at end-December 2019. PrimeVigilance USA was acquired in January 2020 (all cash), which means Ergomed has earned the £8m spent amount back, indicating strong cash flow in the period. The company has access to £30m in debt, which could be used for further business expansion.

We have made some revisions to our estimates, mainly to reflect the top-line trends reported in the H120 trading update (Exhibit 1). The effect on our top-line estimate for 2020 was slightly net positive and our adjusted EBITDA estimates now stand at £16.9m and £18.8m for 2020 and 2021, respectively.

We value Ergomed using 2020 and 2021 peer EV/EBITDA multiples of 20.8x and 16.3x (equally weighted). We note that peer multiples have risen significantly since our 25 March 2020 report (which reflected our prior valuation of £186m); the peer FY20e sector EV/EBITDA multiple used as the basis of the prior valuation was 11.5x.

Exhibit 1: Key changes to our financial forecasts

£m

FY19

FY20e

FY21e

Actual

Old

New

Change (%)

Old

New

Change (%)

Total revenues

68.3

84.8

85.7

1.1%

100.3

100.5

0.2%

– PrimeVigilance

35.4

49.6

53.6

8.1%

58.0

58.4

0.8%

– CRO

32.8

35.2

32.1

-8.8%

42.3

42.1

-0.5%

O/W pass-through

8.5

7.5

6.7

-10.5%

8.5

8.8

4.1%

Adjusted EBITDA

12.5

14.9

16.9

13.1%

17.6

18.8

6.7%

Adjusted EBIT

8.8

13.5

15.4

14.5%

16.2

17.3

7.3%

Adjusted EPS (p)

19.8

24.9

27.7

11.6%

28.9

29.8

3.1%

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)

Market consensus forecast/actual FY19

Syneos Health

8,829

13.68

1.89

18.81

2.08

PRA Health Sciences

7,536

14.14

2.46

19.79

5.96

ICON

9,796

19.79

3.49

27.73

6.32

Medpace

3,604

24.09

4.19

34.97

5.24

Average

7,441

17.93

3.01

25.32

4.90

FY20e

Syneos Health

8,829

14.98

1.98

20.42

2.11

PRA Health Sciences

7,536

16.23

2.46

23.79

5.41

ICON

9,796

22.53

3.64

32.05

7.04

Medpace

3,604

29.62

4.35

44.80

5.08

Average

7,441

20.84

3.10

30.26

4.91

FY21e

Syneos Health

8,829

12.73

1.77

16.28

1.94

PRA Health Sciences

7,536

13.23

2.23

18.21

4.95

ICON

9,796

18.62

3.24

25.37

6.36

Medpace

3,604

20.55

3.51

29.63

4.59

Average

7,441

16.28

2.69

22.37

4.46

Source: Refinitiv. Note: Prices at 21 July 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

85,726

100,509

Cost of sales

(22,398)

(26,788)

(29,790)

(39,902)

(46,751)

Reimbursable expenses

(7,609)

(8,070)

(8,940)

(7,472)

(9,645)

Gross profit

17,617

19,254

29,525

38,352

44,113

Gross margin %

37%

36%

43%

45%

44%

SG&A (expenses)

(19,784)

(28,152)

(23,513)

(23,394)

(27,241)

R&D costs

(2,689)

(1,578)

(545)

(485)

(495)

Other income/(expense)

952

30

51

0

0

Exceptionals and adjustments

5,062

10,165

3,265

957

957

Reported EBITDA

(2,278)

(7,912)

9,230

15,924

17,836

Depreciation and amortisation

1,626

2,534

3,712

1,451

1,460

Reported EBIT

(3,904)

(10,446)

5,518

14,473

16,376

Finance income/(expense)

(543)

(599)

(245)

(205)

(156)

Other income/(expense)

0

277

(286)

0

0

Reported PBT

(4,447)

(10,768)

4,987

14,268

16,220

Income tax expense (includes exceptionals)

(57)

(89)

583

(2,510)

(3,244)

Reported net income

(4,504)

(8,980)

5,570

11,758

12,976

Basic average number of shares, m

41.1

44.7

46.6

47.5

48.3

Basic EPS (p)

(11.0)

(20.1)

12.0

24.8

26.8

 

Adjusted EBITDA

2,784

2,253

12,495

16,881

18,793

Adjusted EBIT

1,158

(281)

8,783

15,430

17,333

Adjusted PBT

1,782

960

8,637

15,676

17,637

Adjusted EPS (p)

4.2

1.9

19.8

27.7

29.8

Adjusted diluted EPS (p)

4.2

1.9

19.8

27.7

29.8

Order book

88,200

109,200

125,000

143,961

163,810

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

Property, plant and equipment

1,078

1,344

1,110

1,100

1,090

Right-of-use assets

-

-

5,171

5,171

5,171

Goodwill

15,269

13,659

13,380

21,080

21,080

Intangible assets

20,229

3,740

2,755

2,304

1,845

Other non-current assets

2,367

2,646

2,616

2,666

2,716

Total non-current assets

38,943

21,389

25,032

32,321

31,902

Cash and equivalents

3,218

5,189

14,259

17,839

30,043

Trade and other receivables

16,807

16,429

14,359

19,528

22,867

Other current assets

2,945

3,857

5,665

5,665

5,665

Total current assets

22,970

25,475

34,283

43,032

58,575

Lease liabilities

0

0

3,716

3,716

3,716

Long term debt

0

0

Other non-current liabilities

13,201

1,314

635

635

635

Total non-current liabilities

13,207

1,314

4,351

4,351

4,351

Trade and other payables

10,717

10,989

10,373

14,653

16,801

Lease liabilities

0

0

1,718

1,718

1,718

Other current liabilities

3,134

6,192

6,053

6,053

6,053

Total current liabilities

13,863

17,187

18,144

22,424

24,572

Equity attributable to company

34,843

28,363

36,820

48,578

61,554

 

 

 

 

 

CASH FLOW STATEMENT

 

 

 

 

Profit before tax

(4,447)

(10,768)

4,987

14,268

16,220

Cash from operations (CFO)

70

1,044

11,788

12,270

13,194

Capex

(1,425)

(1,587)

(996)

(1,000)

(1,000)

Acquisitions & disposals net

(1,932)

(398)

(107)

(7,690)

10

Other investing activities

(559)

(751)

(1,728)

0

0

Cash used in investing activities (CFIA)

(3,916)

(2,736)

(2,831)

(8,690)

(990)

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

0

0

Cash from financing activities (CFF)

2,684

3,774

(250)

0

0

Increase/(decrease) in cash and equivalents

(1,162)

2,082

8,707

3,580

12,204

Currency translation differences and other

(44)

(111)

363

0

0

Cash and equivalents at start of period

4,424

3,218

5,189

14,259

17,839

Cash and equivalents at end of period

3,218

5,189

14,259

17,839

30,043

Net (debt) cash

3,218

5,189

14,259

17,839

30,043

Source: Ergomed accounts, Edison Investment Research

General disclaimer and copyright

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.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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Schumannstrasse 34b

60325 Frankfurt

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London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 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

General disclaimer and copyright

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.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 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

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

1,185 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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Research: TMT

CREALOGIX Group — FY20 results slightly below forecasts, strong H2

In its preliminary results, CREALOGIX announced a sales increase of 1.7% to CHF103.7m (FY19 CHF101.9m), 3.9% growth in constant currencies. As expected, there was an acceleration of growth in H220, 13.2% higher than H120, but revenues still fell c 1.7% short of our forecasts. Adjusted EBITDA of CHF2.4m was higher than in FY19 (CHF1.86m), although 6.8% off our EBITDA forecast of CHF2.58m. EBITDA excluded one-off provisions of CHF7.0m for streamlining business processes, unifying the product platform and a staff reorganisation, leading to job cuts of around 10% of headcount. After these provisions, the group reported an EBITDA loss of CHF4.6m. These measures are intended to accelerate the group’s transition to becoming a leading SaaS provider of digital banking platforms, with initial benefits from this investment expected to be seen in FY21, and a full year of benefit in FY22. Our forecasts (which exclude these exceptional items) remain unchanged pending the full-year results on 15 September 2020.

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