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Research: Healthcare
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.
Written by
Jonas Peciulis
Ergomed |
Adj EBITDA upgrade despite industry challenges |
H120 interim report |
Healthcare services |
22 September 2020 |
Share price performance
Business description
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Analyst
Ergomed is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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
|
|
Research: TMT
CREALOGIX is a leading, global, digital banking engagement platform provider. In FY20, revenues grew 1.7% to CHF103.7m, with adjusted EBITDA rising to CHF2.4m, slightly below our expectations. Revenues grew 13.2% in H220 vs H120, with minimal impact from the COVID-19 pandemic. Recurring revenues continued to rise to 44%, with SaaS 17% of the mix, while international sales fell to 62%. Management announced a reorganisation (with a CHF7m provision) to accelerate the SaaS transition, funded by the CHF25m convertible H120 bond refinancing. The SaaS transition will be a drag in FY21 (although we expect stronger margins in H221), before a full year of benefit in FY22. We have lowered our forecasts slightly to reflect a more uncertain global economic outlook.
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