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Research: Healthcare
Ergomed’s FY21 results showed that adjusted EBITDA of £25.4m was ahead of our estimate of £24.0m and consensus of £23.4m. A strong order book (£239.7m, up 24.2% y-o-y), continued overall business growth and a rapidly improving balance sheet position Ergomed for another solid year of growth. Ergomed recently acquired ADAMAS Consulting Group, which we have now incorporated in our model. A UK-based quality assurance services provider, ADAMAS will diversify revenue sources (its offerings do not overlap with Ergomed’s). According to management, the acquisition should be immediately accretive to earnings. We have raised our valuation to £777m or 1,577p/share (versus 1,536p/share previously).
Written by
Jonas Peciulis
Ergomed |
Healthy fundamentals for 2022 |
FY21 results |
Healthcare services |
27 April 2022 |
Share price performance
Business description
Next events
Analyst
Ergomed is a research client of Edison Investment Research Limited |
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Ergomed’s FY21 results showed that adjusted EBITDA of £25.4m was ahead of our estimate of £24.0m and consensus of £23.4m. A strong order book (£239.7m, up 24.2% y-o-y), continued overall business growth and a rapidly improving balance sheet position Ergomed for another solid year of growth. Ergomed recently acquired ADAMAS Consulting Group, which we have now incorporated in our model. A UK-based quality assurance services provider, ADAMAS will diversify revenue sources (its offerings do not overlap with Ergomed’s). According to management, the acquisition should be immediately accretive to earnings. We have raised our valuation to £777m or 1,577p/share (versus 1,536p/share previously).
Year end |
Revenue (£m) |
Adjusted EBITDA* (£m) |
EPS* |
DPS |
P/E |
Yield |
12/20 |
86.4 |
19.4 |
23.8 |
0.0 |
N/M |
N/A |
12/21 |
118.6 |
25.4 |
41.3 |
0.0 |
N/M |
N/A |
12/22e |
140.3 |
28.1 |
43.9 |
0.0 |
28.0 |
N/A |
12/23e |
156.3 |
31.6 |
49.5 |
0.0 |
24.8 |
N/A |
Note: *Adjusted EBITDA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Product mix shifting to US, but gross margins stable
Top-line numbers, including business segment revenues, were released with the trading update in January 2022, which we addressed in our last report. FY21 total gross margin was 40.8% versus 4 5.9% last year, which is explained by increased pass-through revenues in the CRO segment in 2021 due to the rapid growth of the US business (63% of total revenue in 2021). The FY21 gross margin of 43.3% on underlying CRO business service fees stayed at similar level to the prior year (FY20: 46.3%) despite FX headwinds. In the PV segment, the gross margin on service fees also stayed at a similar level (FY21: 51.3% vs FY20: 52.4%).
Adjusted EBITDA better than expected
FY21 adjusted EBITDA increased to £25.4m from £19.4m in FY20 and was somewhat better than our estimate of £24.0m and consensus of £23.4m. As well as updating our model for Ergomed’s FY21 results, we have made some changes to our estimates. We also included the ADAMAS business based on the high-level information about its performance released so far. Our updated total revenue estimates are £140.3m (PV: £73.8m, CRO: £66.5m) in 2022 and £156.3m (PV: £83.4m, CRO: £72.9m) in 2023. Our adjusted EBITDA estimates now stand at £28.1m (from £27.9m) in 2022 and £31.6m (from £34.9m) in 2023.
Valuation: £777m or 1,577p/share
We have increased our DCF-based valuation to £777m or 1,577p/share compared to £751m or 1,536p/share previously due to rolling the model forward, updating our estimates and including the acquisition of ADAMAS. Our valuation implies an EV/EBITDA multiple of 26.5x (FY22e). Ergomed trades at a premium on FY22e EV/EBITDA (consensus) of 20.4x vs the peer average of 13.9x. Our bull case scenario valuation stands at 2,011p/share and our bear case at 1,227p/share, both based on our different sets of DCF assumptions (long-term sales growth and profit margins; for details, see our Outlook report).
FY22 update: Solid year despite the pandemic
Solid top-line numbers have already been reported
As a reminder, total 2021 revenues were £118.6m, up 37.3% y-o-y (our estimate and consensus were both £119.6m), despite continuing FX headwinds (at constant exchange rates, CER, growth was 44.3%, see Exhibit 1A).
Revenues in the CRO segment increased to £58.1m, up 85.5% (97.3% CER; our estimate was £56.0m). This includes MedSource, acquired in December 2020. Excluding MedSource, CRO revenues increased by 26.2% (33.2% CER), indicating a strong rebound after the CRO industry was affected by the pandemic.
Revenues in the PV segment increased to £60.5m, up 9.9% (14.2% CER; our estimate was £63.6m).
Stable underlying gross margins
FY21 total gross margin was 40.8% versus 45.9% last year, which is explained by increased pass-through revenues in the CRO segment in 2021 due to the rapid growth of the US business. Some of the costs in each business segment are passed through to customers but booked as Ergomed’s revenues (at no profit; profitable revenues are service fees which Ergomed collects from customers). While pass-through revenues are minimal in the PV segment, their mix in the CRO segment is much higher, which affects reported and underlying gross margins (Exhibit 1B).
The FY21 gross margin of 43.3% on underlying CRO business service fees stayed at a similar level to the prior year (FY21: 46.3%) despite FX headwinds. In the PV segment, the FY21 gross margin on service fees was also at a similar level (FY21: 51.3% versus FY20: 52.4%) (Exhibit 1C). Underlying gross profit increased by a healthy 21.9% to £48.4m.
|
Exhibit 1: Ergomed’s revenue mix and gross margin developments |
|
|
Source: Ergomed |
Adjusted EBITDA better than expected
FY21 adjusted EBITDA increased to £25.4m from £19.4m in FY20 and was somewhat better than our estimate of £24.0m and consensus of £23.4m. Total FY21 operating expenses were £33.7m versus our expected £35.3m. Adjusted FY21 EPS came in at 41.3p versus our estimate of 34.1p.
Cash and cash equivalents increased by £12.2m to £31.2m and the company was debt free at the year end. The order book was strengthened by organic growth, finishing at £239.7m (up 24.2% year-on-year) providing good visibility into 2022.
ADAMAS diversifies Ergomed offering and revenue sources
In February 2022, Ergomed announced that it had agreed to acquire UK-based ADAMAS Consulting Group. ADAMAS offers a full range of quality assurance services and specialises in auditing pharmaceutical manufacturing processes, clinical trials and pharmacovigilance systems. There is little overlap in the offerings of the two companies, so with this acquisition Ergomed expanded its expertise.
ADAMAS booked £8.5m in revenue, up 31% y-o-y, and £1.8m in adjusted EBITDA in 2021. Gross margin on fee income is around 50%, so somewhat better than Ergomed’s total gross margin in 2021. ADAMAS expects its revenues to grow by more than 20% per year in 2022–23, with the EBITDA margin reaching more than 20% (Ergomed’s adjusted EBITDA margin was 21.4% in 2021).
Ergomed paid £25.6m (all cash), giving ADAMAS an EV of £24.2m (£1.4m in cash on the balance sheet). This EV implies c 12.0x guided adjusted EBITDA in 2022. Ergomed’s EV/adjusted EBIDTA multiples pre-acquisition were 21.8x (2021) and 18.8x (2022). It indicated that the transaction will be immediately accretive to earnings.
Revenues generated by ADAMAS will be allocated to Ergomed’s CRO and PV segments. Although there is no overlap with Ergomed’s existing business, the characteristics of ADAMAS’s services are sufficiently similar and there is no need for the creation of a separate business segment. ADAMAS will continue to operate as an independent consulting business and its existing senior executive team will continue in their current positions in the business. We believe this demonstrates Ergomed’s trust in the management team and processes at ADAMAS, and provides confidence that the integration will be smooth.
According to management, the M&A strategy remains intact post the acquisition of ADAMAS. Ergomed will consider the right businesses at the right price and still has access to an unused credit facility of £30m.
Estimate revisions
As well as updating our model for Ergomed’s FY21 results, we have made some changes to our estimates. 2021 PV sales came in at £60.5m versus our expected £63.5m and we have therefore lowered our near-term forecasts. However, after adding the ADAMAS business, our FY22 estimate is relatively unchanged, at £73.8m (Exhibit 2). As the CRO segment performed slightly better than expected, we have therefore increased our FY22 estimate slightly. Our updated total revenue estimates are £140.3m (PV: £73.8m, CRO: £66.5m) in 2022 and £156.3m (PV: £83.4m, CRO: £72.9m) in 2023.
We also revised our expected gross margins in 2022 and 2023, as discussed above. This was offset by the revision of SG&A costs, which were lower than we had expected. As a result, our adjusted EBITDA estimate is little changed for FY22 but somewhat lower in FY23. Our adjusted EBITDA estimates now stand at £28.1m in 2022 and £31.6m in 2023.
With regards to ADAMAS, Ergomed will consolidate the new business in its next report (for H122, due in July 2022). Ahead of that, we have made preliminary changes to our model to reflect the acquisition based on the details and high-level information about ADAMAS’s performance released so far (described above).
We forecast that the end-2022 cash position will be lower at £26.8m (versus £31.2m in 2021) due to the all-cash ADAMAS acquisition, but expect it to increase to £48.8m in 2023, reflecting strong cash generation.
Exhibit 2: Key changes to forecasts
£m |
FY21 |
FY22e |
FY23e |
||||||
Est |
Act |
Change (%) |
Old |
New |
Change (%) |
Old |
New |
Change (%) |
|
Total revenues |
119.6 |
118.6 |
-0.9% |
136.8 |
140.3 |
2.6% |
161.3 |
156.3 |
-3.1% |
– PrimeVigilance |
63.6 |
60.5 |
-4.9% |
73.6 |
73.8 |
0.2% |
88.2 |
83.4 |
-5.4% |
– CRO |
56.0 |
58.1 |
3.7% |
63.3 |
66.5 |
5.2% |
73.1 |
72.9 |
-0.3% |
O/W pass-through |
13.6 |
17.6 |
29.9% |
15.3 |
20.6 |
34.1% |
17.7 |
22.2 |
25.4% |
Gross profit |
54.1 |
48.4 |
-10.6% |
61.4 |
57.0 |
-7.2% |
72.7 |
64.1 |
-11.7% |
– Gross margin |
45.3% |
40.8% |
-4.5pp |
44.8% |
40.6% |
-4.2pp |
45.0% |
41.0% |
-4.0pp |
Adjusted EBITDA |
24.0 |
25.4 |
6.0% |
27.9 |
28.1 |
0.9% |
34.9 |
31.6 |
-9.5% |
– Adj. EBITDA margin |
20.0% |
21.4% |
1.4pp |
20.4% |
20.1% |
-0.3pp |
21.6% |
20.2% |
-1.4pp |
Adjusted EBIT |
19.8 |
20.4 |
2.8% |
23.7 |
26.0 |
9.5% |
30.7 |
29.4 |
-4.3% |
– Adj. EBIT margin |
16.6% |
17.2% |
0.6pp |
17.4% |
18.5% |
1.2pp |
19.0% |
18.8% |
-0.2pp |
Adjusted EPS (p) |
34.1 |
41.1 |
20.8% |
40.5 |
43.9 |
8.3% |
52.1 |
49.5 |
-4.9% |
Source: Ergomed FY21 results, Edison Investment Research
Valuation
Our valuation of Ergomed is higher at £777m or 1,577p/share versus our last published £751m or 1,536p/share valuation in the post-trading update in January 2022. This is derived from our DCF model using a 10% discount and 2% terminal growth rates. Our valuation implies an EV/EBITDA multiple of 26.5x based on our FY22 forecasts. We note that Ergomed trades at a premium EV/EBITDA (FY22e) of 20.4x compared to the peer average of 13.9x.
Exhibit 3: Ergomed base case DCF model
£'000s |
2022e |
2023e |
2024e |
2025e |
2026e |
2027e |
2028e |
2029e |
2030e |
|||
Revenue |
140,296 |
156,273 |
179,714 |
206,371 |
236,639 |
270,952 |
309,788 |
353,675 |
403,190 |
|||
Growth (%) |
18.3% |
11.4% |
15.0% |
14.8% |
14.7% |
14.5% |
14.3% |
14.2% |
14.0% |
|||
Adj. EBIT |
25,986 |
29,402 |
35,943 |
43,682 |
52,849 |
63,674 |
76,414 |
91,366 |
108,861 |
|||
Margin (%) |
18.5% |
18.8% |
20.0% |
21.2% |
22.3% |
23.5% |
24.7% |
25.8% |
27.0% |
|||
Tax |
(4,705) |
(5,354) |
(6,658) |
(8,104) |
(9,817) |
(11,841) |
(14,224) |
(17,024) |
(20,301) |
|||
Rate (%) |
-19% |
-19% |
-19% |
-19% |
-19% |
-19% |
-19% |
-19% |
-19% |
|||
D&A |
2,150 |
2,150 |
2,150 |
2,150 |
2,150 |
2,150 |
2,150 |
2,150 |
2,150 |
|||
Working capital |
286 |
(909) |
(1,419) |
(1,794) |
(239) |
(2,103) |
987 |
2,214 |
3,188 |
|||
Capex* |
(25,770) |
(1,550) |
(1,473) |
(1,550) |
(864) |
(1,207) |
(1,036) |
(1,121) |
(1,078) |
|||
Operating free cash flow |
(2,053) |
23,739 |
28,542 |
34,385 |
44,080 |
50,673 |
64,291 |
77,586 |
92,820 |
|||
Value |
Value/share |
|||||||||||
DCF for forecast period (2022 to 2023) |
18.2 |
36.9 |
||||||||||
DCF for transition period (2023 to 2030) |
214.3 |
434.9 |
||||||||||
Terminal value |
513.6 |
1,042.0 |
||||||||||
Enterprise value |
746.1 |
1,513.7 |
||||||||||
Net cash, end FY21 |
31.2 |
63.4 |
||||||||||
Equity value |
777.3 |
1,577.1 |
||||||||||
Source: Edison Investment Research. Note: 10% WACC. Note: *Acquisition of ADAMAS in February 2022.
Exhibit 4: Ergomed comparable companies
Company |
Price |
Market cap |
EV/EBITDA (x) |
EV/sales (x) |
P/E (x) |
||||||
2022e |
2023e |
2024e |
2022e |
2023e |
2024e |
2022e |
2023e |
2024e |
|||
|
Ergomed* |
1,406p |
£605m |
20.4x |
18.2x |
11.4x |
4.1x |
3.7x |
3.0x |
28.8x |
25.5x |
20.1x |
|
Syneos |
$66.0 |
$6,905m |
11.3x |
10.1x |
9.2x |
1.7x |
1.6x |
1.5x |
13.3x |
11.7x |
10.2x |
|
ICON |
$210.7 |
$17,181m |
15.5x |
13.8x |
12.6x |
2.8x |
2.6x |
2.4x |
18.0x |
15.4x |
13.3x |
|
Medpace |
$132.6 |
$4,461m |
14.9x |
13.2x |
10.9x |
2.8x |
2.5x |
2.1x |
22.9x |
20.9x |
17.4x |
|
Average |
|
|
13.9x |
12.4x |
10.9x |
2.4x |
2.2x |
2.0x |
18.0x |
16.0x |
13.6x |
Source: Edison Investment Research, Refinitiv. *Edison estimates. Priced at 27 April 2022.
Exhibit 5: Financial summary
Accounts: IFRS, year-end 31 December (£000s) |
2019 |
2020 |
2021 |
2022e |
2023e |
||
INCOME STATEMENT |
|
|
|
|
|||
Total revenues |
68,255 |
86,391 |
118,581 |
140,296 |
156,273 |
||
Cost of sales |
(29,790) |
(38,686) |
(52,191) |
(61,730) |
(68,760) |
||
Reimbursable expenses |
(8,940) |
(8,055) |
(18,028) |
(21,609) |
(23,388) |
||
Gross profit |
29,525 |
39,650 |
48,362 |
56,957 |
64,125 |
||
Gross margin % |
43% |
46% |
41% |
41% |
41% |
||
SG&A (expenses) |
(23,513) |
(27,803) |
(34,877) |
(31,740) |
(35,487) |
||
R&D costs |
(545) |
(152) |
(130) |
(207) |
(211) |
||
Other income/(expense) |
51 |
1,839 |
1,269 |
0 |
0 |
||
Exceptionals and adjustments |
3,265 |
993 |
5,753 |
976 |
976 |
||
Reported EBITDA |
9,230 |
18,378 |
19,670 |
27,160 |
30,576 |
||
Depreciation and amortisation |
3,712 |
4,844 |
5,046 |
2,150 |
2,150 |
||
Reported EBIT |
5,518 |
13,534 |
14,624 |
25,010 |
28,426 |
||
Finance income/(expense) |
(245) |
(395) |
(360) |
(245) |
(245) |
||
Other income/(expense) |
(286) |
(511) |
0 |
0 |
0 |
||
Reported PBT |
4,987 |
12,628 |
14,264 |
24,765 |
28,181 |
||
Income tax expense (includes exceptionals) |
583 |
(2,946) |
(1,590) |
(4,705) |
(5,354) |
||
Reported net income |
5,570 |
9,682 |
12,674 |
20,060 |
22,827 |
||
Basic average number of shares, m |
46.6 |
48.3 |
48.5 |
49.3 |
49.3 |
||
Basic EPS (p) |
12.0 |
20.0 |
26.2 |
40.7 |
46.3 |
||
Adjusted EBITDA |
12,495 |
19,371 |
25,423 |
28,136 |
31,552 |
||
Adjusted EBIT |
8,783 |
14,527 |
20,377 |
25,986 |
29,402 |
||
Adjusted PBT |
8,637 |
14,442 |
21,616 |
26,341 |
29,757 |
||
Adjusted EPS (p) |
19.8 |
23.8 |
41.3 |
43.9 |
49.5 |
||
Adjusted diluted EPS (p) |
19.8 |
22.8 |
39.6 |
42.6 |
48.1 |
||
Order book |
124,100 |
193,000 |
239,700 |
254,919 |
312,036 |
||
BALANCE SHEET |
|
|
|||||
Property, plant and equipment |
1,110 |
1,742 |
1,966 |
1,986 |
1,986 |
||
Right-of-use assets |
5,171 |
4,715 |
2,691 |
2,691 |
2,691 |
||
Goodwill |
13,380 |
24,605 |
23,903 |
23,903 |
23,903 |
||
Intangible assets |
2,755 |
9,618 |
7,653 |
31,253 |
30,653 |
||
Other non-current assets |
2,616 |
4,898 |
9,433 |
9,433 |
9,433 |
||
Total non-current assets |
25,032 |
45,578 |
45,646 |
69,266 |
68,666 |
||
Cash and equivalents |
14,259 |
18,994 |
31,243 |
26,774 |
48,781 |
||
Trade and other receivables |
14,359 |
22,224 |
25,143 |
33,160 |
37,500 |
||
Other current assets |
3,382 |
5,553 |
3,958 |
3,958 |
3,958 |
||
Total current assets |
32,000 |
46,771 |
60,344 |
63,892 |
90,239 |
||
Lease liabilities |
3,716 |
3,128 |
1,432 |
1,432 |
1,432 |
||
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 |
3,371 |
3,371 |
||
Trade and other payables |
10,373 |
15,702 |
15,207 |
22,315 |
25,235 |
||
Lease liabilities |
1,718 |
1,978 |
1,249 |
1,249 |
1,249 |
||
Other current liabilities |
3,770 |
15,932 |
18,924 |
18,924 |
18,924 |
||
Total current liabilities |
15,861 |
33,612 |
35,380 |
42,488 |
45,408 |
||
Equity attributable to company |
36,820 |
52,866 |
67,239 |
87,299 |
110,126 |
||
CASH FLOW STATEMENT |
|
|
|||||
Profit before tax |
4,987 |
12,628 |
14,264 |
24,765 |
28,181 |
||
Cash from operations (CFO) |
11,788 |
18,048 |
18,683 |
21,300 |
23,557 |
||
Capex |
(996) |
(974) |
(983) |
(1,570) |
(1,550) |
||
Acquisitions & disposals net |
(107) |
(11,985) |
103 |
(24,200) |
0 |
||
Other investing activities |
(1,728) |
0 |
(3,267) |
0 |
0 |
||
Cash used in investing activities (CFIA) |
(2,831) |
(12,776) |
(4,146) |
(25,770) |
(1,550) |
||
Net proceeds from issue of shares |
1,427 |
0 |
0 |
0 |
0 |
||
Movements in debt |
(1,677) |
(2,189) |
(2,490) |
0 |
0 |
||
Other financing activities |
0 |
(157) |
(169) |
0 |
0 |
||
Cash from financing activities (CFF) |
(250) |
(477) |
(2,113) |
0 |
0 |
||
Increase/(decrease) in cash and equivalents |
8,707 |
4,795 |
12,424 |
(4,470) |
22,007 |
||
Currency translation differences and other |
363 |
(60) |
(175) |
0 |
0 |
||
Cash and equivalents at start of period |
5,189 |
14,259 |
18,994 |
31,243 |
26,774 |
||
Cash and equivalents at end of period |
14,259 |
18,994 |
31,243 |
26,774 |
48,781 |
||
Net (debt)/cash |
14,259 |
18,993 |
31,243 |
26,774 |
48,781 |
||
Source: Ergomed accounts, Edison Investment Research
|
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