Ergomed — Poised for a strong FY22

Ergomed (AIM: ERGO)

Currency in GBP

Last close As at 26/01/2023

GBP12.54

−54.00 (−4.13%)

Market capitalisation

GBP658m

Research: Healthcare

Ergomed — Poised for a strong FY22

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).

Jyoti Prakash

Written by

Jyoti Prakash

Analyst, Healthcare

Healthcare

Ergomed

Poised for a strong FY22

H122 results

Healthcare services

30 September 2022

Price

1,114p

Market cap

£557m

Net cash (£m) at 30 June 2022

12.0

Shares in issue

50m

Free float

81%

Code

ERGO

Primary exchange

AIM

Secondary exchange

Frankfurt Xetra

Share price performance

%

1m

3m

12m

Abs

(2.3)

11.4

(12.9)

Rel (local)

4.3

17.7

(8.0)

52-week high/low

1540p

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 result

March 2023

Analysts

Soo Romanoff

+44 (0)20 3077 5700

Jyoti Prakash, CFA

+44 (0)20 3077 5700

Nidhi Singh

+44 (0)20 3077 5700

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*
(p)

DPS
(p)

P/E
(x)

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

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Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

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1185 Avenue of the Americas

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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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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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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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