Ergomed — Exiting FY22 on a strong footing

Ergomed (AIM: ERGO)

Currency in GBP

Last close As at 02/02/2023

GBP12.08

8.00 (0.67%)

Market capitalisation

GBP604m

Research: Healthcare

Ergomed — Exiting FY22 on a strong footing

In the run-up to Ergomed’s FY22 trading update (expected end-January 2023), we take a fresh look at our estimates for the company and make minor adjustments to our projections to incorporate recent forex trends (primarily related to the US dollar strengthening in H222), management feedback and increased clarity on business performance. We raise our FY22–23 top-line estimates by c £2m for both years (benefiting from forex tailwinds), although our profitability and margin expectations remain largely unchanged as we increase our opex estimates slightly. We also update our capex and working capital estimates following clarity from the company management. Overall, our valuation remains broadly unchanged at £789m (1,573p/share) versus £783m (or 1,568p/share).

Soo Romanoff

Written by

Soo Romanoff

Managing Director - Head of Content, Healthcare

Healthcare

Ergomed

Exiting FY22 on a strong footing

Estimates update

Healthcare services

21 December 2022

Price

1,286p

Market cap

£645m

Estimated net cash (£m) at 31 December 2022

19.3

Shares in issue

50.2m

Free float

81%

Code

ERGO

Primary exchange

AIM

Secondary exchange

Frankfurt Xetra

Share price performance

%

1m

3m

12m

Abs

(2.9)

14.5

(7.8)

Rel (local)

(2.1)

12.2

(6.3)

52-week high/low

1,515p

932p

Business description

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

Next events

FY22 trading update

January 2023

FY22 results

March 2023

Analysts

Soo Romanoff

+44 (0)20 3077 5700

Jyoti Prakash, CFA

+44 (0)20 3077 5700

Ergomed is a research client of Edison Investment Research Limited

In the run-up to Ergomed’s FY22 trading update (expected end-January 2023), we take a fresh look at our estimates for the company and make minor adjustments to our projections to incorporate recent forex trends (primarily related to the US dollar strengthening in H222), management feedback and increased clarity on business performance. We raise our FY22–23 top-line estimates by c £2m for both years (benefiting from forex tailwinds), although our profitability and margin expectations remain largely unchanged as we increase our opex estimates slightly. We also update our capex and working capital estimates following clarity from the company management. Overall, our valuation remains broadly unchanged at £789m (1,573p/share) versus £783m (or 1,568p/share).

Year end

Revenue
(£m)

Adjusted EBITDA*(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/20

86.4

19.4

23.8

0.0

54.1

N/A

12/21

118.6

25.4

41.3

0.0

31.1

N/A

12/22e

142.1

28.1

40.4

0.0

31.9

N/A

12/23e

158.3

31.4

44.9

0.0

28.7

N/A

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

Earnings expectations adjusted slightly

Given that the majority of Ergomed’s revenue is generated in the United States (c 63% in H122) and is denominated in US dollars, the company has benefited from the recent strengthening of the US dollar against other major currencies such as sterling and the euro. We now incorporate the forex contribution in our top line, which results in our FY22 and FY23 revenue estimates increasing to £142.1m and £158.3m, respectively (vs. our previous estimates of £140.1m and £156.5m). We also raise our operating estimates to factor in the increased costs associated with recent senior hires as well as investment in technology. Overall, our adjusted EBITDA estimates remain largely unchanged at £28.1m in FY22 and £31.4m in FY23 (£28.2m and £31.7m, previously), although margins are now slightly lower (19.8% in FY22 and FY23, vs 20.1% and 20.3% previously).

Capex and working capital needs revised

We have increased our FY22 capex estimate from £0.9m to £2.0m, assuming higher expenses on fixed assets in H222 (c £0.5m in H122). For FY23, we reduce our expectation from £3.5m to £3.0m. We also adjust our FY22 operating cash flow expectations down from £20.7m to £17.8m, primary driven by increased working capital utilisation assumptions (up from £2.3m to £4.8m). Overall, our estimate for the year-end cash balance falls to £19.3m, from £26.0m previously. Ergomed was debt free at end H122 and remains well capitalised to fund future growth.

Valuation: £789m or 1,573p/share

Our enterprise value decreases marginally due to the slightly lower margins and higher capex and working capital estimates, but has been more than offset by higher period-end net cash (FY22e net cash of £19.3m vs £12m at end-H122). Overall, our valuation remains largely unchanged at £789m or 1,573p/share, versus £783m or 1,568p/share previously.

Exhibit 1: Financial summary

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

2019

2020

2021

2022e

2023e

INCOME STATEMENT

 

 

 

 

 

Total revenues

68,255

86,391

1,18,581

1,42,077

1,58,304

Cost of sales

(29,790)

(38,686)

(52,191)

(62,601)

(69,337)

Reimbursable expenses

(8,940)

(8,055)

(18,028)

(20,489)

(22,896)

Gross profit

29,525

39,650

48,362

58,986

66,070

Gross margin %

43%

46%

41%

42%

42%

SG&A (expenses)

(23,513)

(27,518)

(34,877)

(38,842)

(40,493)

R&D costs

(545)

(152)

(130)

(94)

(95)

Other income/(expense)

50

1,554

1,269

1,057

0

Exceptionals and adjustments

3,265

993

5,753

1,396

500

Reported EBITDA

9,229

18,378

19,670

26,730

30,888

Depreciation and amortisation

3,712

4,844

5,046

5,623

5,406

Reported EBIT

5,517

13,534

14,624

21,107

25,482

Finance income/(expense)

(245)

(395)

(360)

(478)

(478)

Other income/(expense)

(286)

(511)

0

0

0

Reported PBT

4,986

12,628

14,264

20,581

25,004

Income tax expense (includes exceptionals)

583

(2,946)

(1,590)

(4,130)

(5,001)

Reported net income

5,569

9,682

12,674

16,451

20,003

Basic average number of shares, m

46.6

48.3

48.5

50.2

50.2

Basic EPS (p)

12.0

20.0

26.2

32.0

39.0

Adjusted EBITDA

12,494

19,371

25,423

28,126

31,388

Adjusted EBIT

8,782

14,527

20,377

22,503

25,982

Adjusted PBT

8,636

14,442

21,616

24,381

27,504

Adjusted EPS (p)

19.8

23.8

41.3

40.4

44.9

Adjusted diluted EPS (p)

19.0

22.8

39.6

39.4

43.8

Order book

1,24,100

1,93,000

2,39,700

3,04,416

3,53,558

BALANCE SHEET

 

 

 

 

 

Property, plant and equipment

1,110

1,742

1,966

2,909

2,503

Right-of-use assets

5,171

4,715

2,691

2,691

2,691

Goodwill

13,380

24,605

23,903

36,025

36,025

Intangible assets

2,755

9,618

7,653

15,194

13,194

Other non-current assets

2,616

4,898

9,433

9,433

9,433

Total non-current assets

25,032

45,578

45,646

66,252

63,845

Cash and equivalents

14,259

18,995

31,243

19,321

38,696

Trade and other receivables

14,359

22,224

25,143

31,919

37,299

Other current assets

3,382

5,553

3,958

3,958

3,958

Total current assets

32,000

46,771

60,344

55,198

79,953

Lease liabilities

3,716

3,128

1,432

839

839

Long term debt

0

0

0

0

0

Other non-current liabilities

635

2,743

1,939

1,939

1,939

Total non-current liabilities

4,351

5,871

3,371

2,778

2,778

Trade and other payables

10,373

15,702

15,207

17,151

18,996

Lease liabilities

1,718

1,978

1,249

953

953

Other current liabilities

3,770

15,932

18,924

16,149

16,149

Total current liabilities

15,861

33,612

35,380

34,253

36,098

Equity attributable to company

36,820

52,866

67,239

84,419

1,04,922

CASH FLOW STATEMENT

 

 

 

 

 

Profit before tax

4,986

12,628

14,264

20,581

25,004

Cash from operations (CFO)

11,787

18,048

18,683

17,800

22,375

Capex

(996)

(974)

(983)

(1,992)

(3,000)

Acquisitions & disposals net

(107)

(11,985)

103

(24,237)

0

Other investing activities

(1,728)

183

(3,266)

(700)

0

Cash used in investing activities (CFIA)

(2,831)

(12,776)

(4,146)

(26,929)

(3,000)

Net proceeds from issue of shares

1,427

1,869

546

172

0

Movements in debt

(1,677)

0

0

0

0

Other financing activities

0

(2,346)

(2,660)

(2,964)

(2,964)

Cash from financing activities (CFF)

(250)

(477)

(2,114)

(2,792)

(2,964)

Increase/(decrease) in cash and equivalents

8,706

4,795

12,423

(11,921)

16,411

Currency translation differences and other

364

(60)

(175)

(1)

1

Cash and equivalents at start of period

5,189

14,259

18,995

31,243

19,321

Cash and equivalents at end of period

14,259

18,995

31,243

19,321

35,732

Net (debt)/cash

14,259

18,995

31,243

19,321

38,696

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 £60,000 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.

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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

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

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 £60,000 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 2022 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

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

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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