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Last close As at 26/05/2023
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GBP523m
Research: Healthcare
Ergomed released full H122 accounts following its July 2022 trading update, the key takeaway of which was the sustained strong momentum across both business segments despite the underlying biotech market softness. The 24.8% y-o-y revenue growth was supported by geographical expansion, forex tailwinds and a £4m contribution from the ADAMAS acquisition. This in turn translated into robust margins (albeit slightly lower than H121), which should benefit further from the consolidation of the higher-margin ADAMAS business. The order book continued to be strong (24.9% y-o-y growth) indicating a solid sales pipeline for the coming quarters. With a £12m cash balance and £80m in undrawn debt facilities, the company remains well capitalised to fund future growth. Our valuation goes up slightly to £783m or 1,568p/share on a higher share count (versus £777m and 1,577p/share previously).
Ergomed |
Poised for a strong FY22 |
H122 results |
Healthcare services |
30 September 2022 |
Share price performance
Business description
Next events
Analysts
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Ergomed released full H122 accounts following its July 2022 trading update, the key takeaway of which was the sustained strong momentum across both business segments despite the underlying biotech market softness. The 24.8% y-o-y revenue growth was supported by geographical expansion, forex tailwinds and a £4m contribution from the ADAMAS acquisition. This in turn translated into robust margins (albeit slightly lower than H121), which should benefit further from the consolidation of the higher-margin ADAMAS business. The order book continued to be strong (24.9% y-o-y growth) indicating a solid sales pipeline for the coming quarters. With a £12m cash balance and £80m in undrawn debt facilities, the company remains well capitalised to fund future growth. Our valuation goes up slightly to £783m or 1,568p/share on a higher share count (versus £777m and 1,577p/share previously).
Year end |
Revenue (£m) |
Adjusted EBITDA*(£m) |
EPS* |
DPS |
P/E |
Yield |
12/20 |
86.4 |
19.4 |
23.8 |
0.0 |
46.8 |
N/A |
12/21 |
118.6 |
25.4 |
41.3 |
0.0 |
26.9 |
N/A |
12/22e |
140.1 |
28.2 |
40.0 |
0.0 |
27.9 |
N/A |
12/23e |
156.5 |
31.7 |
45.9 |
0.0 |
24.3 |
N/A |
Note: *Adjusted EBITDA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Underlying growth supported by acquisitions
The clinical research services (CRO) segment (26.2% reported revenue growth and 21.4% at constant exchange rate (CER) to £34.3m) profited from new contract wins from the focus speciality pharma and rare disease space. The pharmacovigilance (PV) business (23.4% reported and 18.7% CER growth to £35.6m) benefited from a c 90% customer retention rate, highlighting the stickiness of the business. While North America remained the largest market (63.3% of sales and 24.7% y-o-y growth), sales from new businesses grew by 19.8% y-o-y to £108.8m. A robust order book (£284.5m, up 18.7% from end-FY21) indicates strong sales momentum.
Best-in-class margins
Ergomed’s niche focus allows it to record higher gross margins (30–50%) than competing large CROs (20–30% gross margins), making for an attractive investment proposition. The H122 service fee gross margin (excluding the £10.1m zero margin pass-through revenue) stood at a healthy 48.4%, in line with the H121 figure of 48.2%. Adjusted EBITDA grew 13.6% to £13.8m although margins were slightly lower (19.7% vs 21.6% in H122) due to the higher anticipated SG&A expenses. We expect the margins to gradually ramp-up over the forecast period.
Valuation: £783.1m or 1,568p/share
We keep our estimates broadly unchanged following the H122 results although our valuation goes up marginally to £783m (from £777m) from rolling forward our model (offset by a lower cash balance). Per share valuation goes down slightly to 1,564p/share (from 1,577p/share) due to higher shares outstanding. Our valuation implies an FY22e EV/EBITDA multiple of 27.3x. Ergomed trades at a premium on FY22e EV/EBITDA (consensus) of 19.6x versus the peer average of 13.4x.
Ergomed is a research client of Edison Investment Research Limited
H122 update: Broad-based growth
Strong top-line performance across both segments
Total revenues were up 24.8% y-o-y to £69.9m in H122, mainly driven by strong underlying growth (strong order book and new business contracts during the first half) supported by the acquisition of ADAMAS and forex tailwinds. Excluding the acquisitive and forex benefit, we estimate the underlying growth to be around c 13%, a solid standalone performance given the challenging macroeconomic environment. Revenues in the CRO segment increased to £34.3m, up 26.2% (21.4% CER; our estimate was £32.9m). This includes a contribution from the ADAMAS acquisition, which we estimate to be c £1.6m (assuming 40% of the revenues from ADAMAS are incorporated in the CRO segment). Excluding this, we estimate the organic growth to be 20.3%, driven by new contract wins from speciality pharma/biotech companies, despite the current funding overhang affecting development-related activities in the biotech space. Revenues in the PV segment increased to £35.6m (including £2.4m from ADAMAS, based on our estimate), up 23.4% (18.7% CER; our estimate was £36.2m) and were underpinned by sticky customers and repeat business (with a 90% customer retention rate in the segment).
The order book, a leading indicator of future revenue potential, remained strong at £284.5m at end-H122 (backed by a 19.8% y-o-y growth in sales from new business to £108.8m), up 18.7% from £239.7m at end-FY21 and 24.9% over H121, providing visibility into the near-term revenue stream. The growth was supported by FX tailwinds (adding 4.8pp to top-line growth) as the company’s US-focused business benefited from the appreciation of the US dollar against the local currency. North America remains the largest revenue contributing region (63.3% of total revenue), recording revenue growth of 24.7% y-o-y, although we note that margins in the region are lower than other markets, according to management. We also highlight that, as recently as FY19, the US made up 27% of the total revenue mix, which has now grown to 63% following two acquisitions in both business segments (CRO and PV) over the course of 2020. Ergomed is actively seeking opportunities to expand its footprint to other geographies, and this may support margin progression for the company.
|
Exhibit 1: Growth in order book value |
|
|
Source: Ergomed H122 results presentation. Note: *Includes the benefit of the ADAMAS acquisition in H122. |
Focused approach is driving gross margins
Despite the competitive and consolidating CRO landscape, Ergomed has managed to post robust gross margins, significantly higher than peers (larger CROs typically report gross margins in the range of 20–30%). The H122 gross margin was 41.4%, in line with the H121 figure of 41.1%. Gross margins from the service fee revenue (which excludes pass-through revenues, which are essentially certain costs passed through to customers but booked as Ergomed’s revenues at no profit) stood at 48.4%, up from 48.2% in H121, and we see this as a better reflection of the trading performance. While pass-through revenues are minimal in the PV segment, their mix in the CRO segment is much higher (£9.9m versus £0.3m for the PV segment), which is reflected in the 43.4% service fee gross margin recorded by the CRO segment in H122 versus 51.4% for the PV business. We expect this trend to continue in the forecast years. We also see further opportunities for margin uplift from Ergomed’s efforts to enhance automation in the PV segment, which should benefit the company by delivering improved productivity and efficiencies.
EBITDA growth in line with consensus
Ergomed reported H122 operating profit of £9.4m versus £8.5m in H121, although the margin was lower (13.2% versus 15.4%) due to the anticipated growth in SG&A expenses as the company invested in new technology, manpower and senior leadership hires. SG&A expenses stood at £20.2m in H122 (including acquisition-related costs), up 36% from the H121 figure of £14.8m. Adjusted EBITDA increased to £13.8m from £12.1m in H121, in line with consensus estimates. Cash and cash equivalents at end H122 stood at £12m (excluding £24.2m utilised in the cash acquisition of ADAMAS) and the company remains debt-free with undrawn revolving credit facilities worth £80m. We expect the company to be well capitalised to fund its development and growth efforts including continuing to pursue bolt-on acquisitions to generate incremental growth (Ergomed has completed nine acquisitions since listing in 2014).
Estimate revisions
Based on the H122 performance and directional guidance from management in the H122 results, we have kept our estimates broadly unchanged. We forecast that the end-2022 cash position will be lower at £26m (versus £31.2m in 2021) due to the all-cash ADAMAS acquisition, but expect it to increase to £49.9m in 2023, reflecting strong cash generation.
Exhibit 2: Key changes to forecasts
FY21 |
FY22e |
FY23e |
|||||
Actual |
Old |
New |
Change (%) |
Old |
New |
Change (%) |
|
Total revenues |
118.6 |
140.3 |
140.1 |
-0.1% |
156.3 |
156.5 |
0.1% |
– PrimeVigilance |
60.5 |
73.8 |
71.6 |
-2.9% |
83.4 |
80.1 |
-0.4% |
– CRO |
58.1 |
66.5 |
68.5 |
3.0% |
72.9 |
76.4 |
4.9% |
O/W pass-through |
17.6 |
20.6 |
19.6 |
-4.9% |
22.2 |
21.0 |
-5.4% |
Gross profit |
48.4 |
57.0 |
58.3 |
2.3% |
64.1 |
66.2 |
3.3% |
– Gross margin |
40.8% |
40.6% |
41.6% |
1.0pp |
41.0% |
42.3% |
1.3pp |
Adjusted EBITDA |
25.4 |
28.1 |
28.2 |
0.4% |
31.6 |
31.7 |
0.3% |
– Adjusted EBITDA margin |
21.4% |
20.1% |
20.1% |
0.0pp |
20.2% |
20.3% |
0.1pp |
Adjusted EBIT |
20.4 |
26.0 |
22.3 |
-14.2% |
29.4 |
26.2 |
-10.9% |
– Adjusted EBIT margin |
17.2% |
18.5% |
15.9% |
-2.6pp |
18.8% |
16.7% |
-2.1pp |
Adjusted EPS (p) |
41.1 |
43.9 |
40.0 |
-8.9% |
49.5 |
45.9 |
-7.2% |
Source: Ergomed company filings, Edison Investment Research
Valuation
Our valuation of Ergomed remains largely unchanged at £783m or 1,568p/share versus our last £777m or 1,577p/share valuation in the post-trading update in July 2022. This is derived from our DCF model using a 10% discount rate and a 2% terminal growth rate. Our valuation implies an EV/EBITDA multiple of 27.3x based on our FY22 forecasts. We note that Ergomed trades at a premium EV/EBITDA multiple (FY22e) of 19.6x compared to the peer average of 13.4x, which can be attributed to the niche positioning and higher margin profile for the company versus peers.
Exhibit 3: Ergomed base case DCF model
£'000s |
2022e |
2023e |
2024e |
2025e |
2026e |
2027e |
2028e |
2029e |
2030e |
|||
Revenue |
140,110 |
156,518 |
179,996 |
206,695 |
237,010 |
271,377 |
310,274 |
354,229 |
403,821 |
|||
Growth (%) |
18.2% |
11.7% |
15.0% |
14.8% |
14.7% |
14.5% |
14.3% |
14.2% |
14.0% |
|||
Adj. EBIT |
22,312 |
26,185 |
35,999 |
43,750 |
52,932 |
63,773 |
76,534 |
91,509 |
109,032 |
|||
Margin (%) |
16.1% |
16.7% |
20.0% |
21.2% |
22.3% |
23.5% |
24.7% |
25.8% |
27.0% |
|||
Tax |
(3,938) |
(4,778) |
(6,669) |
(8,116) |
(9,832) |
(11,859) |
(14,247) |
(17,050) |
(20,332) |
|||
Rate (%) |
-19% |
-19% |
-19% |
-19% |
-19% |
-19% |
-19% |
-19% |
-19% |
|||
D&A |
5,643 |
5,550 |
5,550 |
5,550 |
5,550 |
5,550 |
5,550 |
5,550 |
5,550 |
|||
Working capital |
(2,273) |
1,500 |
(1,905) |
1,163 |
(3,605) |
(3,820) |
(6,912) |
1,087 |
(4,655) |
|||
Capex* |
(25,173) |
(3,500) |
(3,570) |
(3,749) |
(3,786) |
(3,824) |
(3,862) |
(3,901) |
(3,940) |
|||
Operating free cash flow |
(3,429) |
24,956 |
29,405 |
38,598 |
46,027 |
50,035 |
60,156 |
69,196 |
91,397 |
|||
Value (£m) |
Value/share (p) |
|||||||||||
DCF for forecast period (2022 to 2023) |
18.8 |
37.6 |
||||||||||
DCF for transition period (2023 to 2030) |
222.3 |
444.9 |
||||||||||
Terminal value |
530.0 |
1,061.1 |
||||||||||
Enterprise value |
771.1 |
1,543.6 |
||||||||||
Net cash, end June 2022 |
12.0 |
24.0 |
||||||||||
Equity value |
783.1 |
1,567.7 |
||||||||||
Source: Edison Investment Research. Note: 10% WACC. *Includes acquisition of ADAMAS in February 2022.
Exhibit 4: Ergomed comparable companies
Company |
Price |
EV |
EV/EBITDA (x) |
EV/sales (x) |
P/E (x) |
|||||||||
2021 |
2022e |
2023e |
2024e |
2021 |
2022e |
2023e |
2024e |
2021 |
2022e |
2023e |
2024e |
|||
Ergomed* |
1,150p |
£543m |
28.0x |
19.6x |
17.2x |
15.6x |
6.3x |
4.0x |
3.5x |
3.1x |
50.5x |
29.5x |
23.6x |
20.5x |
Syneos Health |
$47.6 |
$7,667m |
18.2x |
9.1x |
8.5x |
7.7x |
2.6x |
1.4x |
1.3x |
1.2x |
25.1x |
9.5x |
8.9x |
7.8x |
ICON |
$183.7 |
$19,408m |
42.3x |
13.3x |
12.0x |
10.8x |
7.2x |
2.5x |
2.3x |
2.2x |
38.8x |
15.7x |
14.0x |
12.1x |
Medpace |
$147.7 |
$4,786m |
30.3x |
17.7x |
17.0x |
15.3x |
6.1x |
3.4x |
3.2x |
2.9x |
43.2x |
24.0x |
22.8x |
20.9x |
Average |
30.3x |
13.4x |
12.5x |
11.3x |
5.3x |
2.4x |
2.3x |
2.1x |
35.7x |
16.4x |
15.3x |
13.6x |
||
Source: Edison Investment Research, Refinitiv. Note: *Edison estimates. Prices as at 27 September 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 |
140,110 |
156,518 |
Cost of sales |
(29,790) |
(38,686) |
(52,191) |
(61,385) |
(68,085) |
Reimbursable expenses |
(8,940) |
(8,055) |
(18,028) |
(20,390) |
(22,190) |
Gross profit |
29,525 |
39,650 |
48,362 |
58,335 |
66,242 |
Gross margin % |
43% |
46% |
41% |
42% |
42% |
SG&A (expenses) |
(23,513) |
(27,803) |
(34,877) |
(37,709) |
(40,515) |
R&D costs |
(545) |
(152) |
(130) |
(94) |
(100) |
Other income/(expense) |
51 |
1,839 |
1,269 |
672 |
0 |
Exceptionals and adjustments |
3,265 |
993 |
5,753 |
1,109 |
557 |
Reported EBITDA |
9,230 |
18,378 |
19,670 |
27,089 |
31,178 |
Depreciation and amortisation |
3,712 |
4,844 |
5,046 |
5,885 |
5,550 |
Reported EBIT |
5,518 |
13,534 |
14,624 |
21,203 |
25,628 |
Finance income/(expense) |
(245) |
(395) |
(360) |
(478) |
(478) |
Other income/(expense) |
(286) |
(511) |
0 |
0 |
0 |
Reported PBT |
4,987 |
12,628 |
14,264 |
20,725 |
25,150 |
Income tax expense (includes exceptionals) |
583 |
(2,946) |
(1,590) |
(3,938) |
(4,778) |
Reported net income |
5,570 |
9,682 |
12,674 |
16,787 |
20,371 |
Basic average number of shares, m |
46.6 |
48.3 |
48.5 |
50.0 |
50.0 |
Basic EPS (p) |
12.0 |
20.0 |
26.2 |
33.6 |
40.8 |
|
|
|
|
|
|
Adjusted EBITDA |
12,495 |
19,371 |
25,423 |
28,198 |
31,735 |
Adjusted EBIT |
8,783 |
14,527 |
20,377 |
22,312 |
26,185 |
Adjusted PBT |
8,637 |
14,442 |
21,616 |
23,938 |
27,707 |
Adjusted EPS (p) |
19.8 |
23.8 |
41.3 |
40.0 |
45.9 |
Adjusted diluted EPS (p) |
19.8 |
22.8 |
39.6 |
39.0 |
44.7 |
Order book |
124,100 |
193,000 |
239,700 |
305,274 |
352,963 |
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
Property, plant and equipment |
1,110 |
1,742 |
1,966 |
1,291 |
1,241 |
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 |
15,737 |
13,737 |
Other non-current assets |
2,616 |
4,898 |
9,433 |
9,433 |
9,433 |
Total non-current assets |
25,032 |
45,578 |
45,646 |
65,176 |
63,126 |
Cash and equivalents |
14,259 |
18,994 |
31,243 |
25,992 |
49,913 |
Trade and other receivables |
14,359 |
22,224 |
25,143 |
30,709 |
32,161 |
Other current assets |
3,382 |
5,553 |
3,958 |
3,958 |
3,958 |
Total current assets |
32,000 |
46,771 |
60,344 |
60,659 |
86,032 |
Lease liabilities |
3,716 |
3,128 |
1,432 |
468 |
468 |
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 |
2,407 |
2,407 |
Trade and other payables |
10,373 |
15,702 |
15,207 |
18,500 |
21,452 |
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 |
38,673 |
41,625 |
Equity attributable to company |
36,820 |
52,866 |
67,239 |
84,755 |
105,127 |
|
|
|
|
|
|
CASH FLOW STATEMENT |
|
|
|
|
|
Profit before tax |
4,987 |
12,628 |
14,264 |
20,725 |
25,150 |
Cash from operations (CFO) |
11,788 |
18,048 |
18,683 |
20,714 |
27,421 |
Capex |
(996) |
(974) |
(983) |
(936) |
(3,500) |
Acquisitions & disposals net |
(107) |
(11,985) |
103 |
(24,237) |
0 |
Other investing activities |
(1,728) |
0 |
(3,267) |
0 |
0 |
Cash used in investing activities (CFIA) |
(2,831) |
(12,776) |
(4,146) |
(25,173) |
(3,500) |
Net proceeds from issue of shares |
1,427 |
0 |
0 |
0 |
0 |
Movements in debt |
(1,677) |
(2,189) |
(2,490) |
(964) |
0 |
Other financing activities |
0 |
(157) |
(169) |
0 |
0 |
Cash from financing activities (CFF) |
(250) |
(477) |
(2,113) |
(792) |
0 |
Increase/(decrease) in cash and equivalents |
8,707 |
4,795 |
12,424 |
(5,251) |
23,921 |
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 |
25,992 |
Cash and equivalents at end of period |
14,259 |
18,994 |
31,243 |
25,992 |
49,913 |
Net (debt) cash |
14,259 |
18,993 |
31,243 |
25,992 |
49,913 |
Source: Ergomed accounts, Edison Investment Research
|
|
Research: Financials
Helios Underwriting’s financial assets grew 21% from FY21 and could reach £235m by year-end, benefiting from the 111% increase in Lloyd’s of London (Lloyd’s) underwriting capacity (capacity) in FY21. Rising gilt yields drove short-term losses on fixed interest assets and an H122 EPS loss of 5.4p, but we forecast much higher investment returns. Ukraine claims provisions muted the results, but normalised recovery continued. The hard Lloyd’s premium rate environment bodes well for strong underwriting results in the FY23 and thereafter. We upgrade our FY23 EPS forecast by 18.5%, followed by 6.5% in FY24e and 7% in FY25e, resulting in a 6.7% increase in our valuation to 240p/share.
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