Ergomed — Solid FY22 marked by broad-based growth

Ergomed (AIM: ERGO)

Last close As at 17/07/2024

1,042.00

−16.00 (−1.51%)

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529m

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Research: Healthcare

Ergomed — Solid FY22 marked by broad-based growth

Ergomed reported FY22 results broadly in line with our expectations. Group revenues grew 22.5% y-o-y to £145.3m, underpinned by sustained demand for both the CRO and PV segments and supported by the ADAMAS acquisition and foreign exchange benefit. Adjusted EBITDA rose 11.5% y-o-y, although margins were comparatively lower (19.5% versus 21.4% in FY21) due to previously flagged incremental investments in technology and senior management hires. The order book remained robust at £295m (up 23.1% over FY21), boding well for medium-term sales potential. Year-end net cash of £19.1m was an improvement over the £12m reported in H122 (after the £24.2m net cash purchase of ADAMAS in February 2022) and, with £80m in undrawn credit facilities, Ergomed remains well-capitalised to fund future growth. We make minor adjustments to our estimates and roll forward our model. We upgrade our valuation slightly to 1,577p/share from 1,573p/share previously.

Soo Romanoff

Written by

Soo Romanoff

Managing Director - Head of Content, Healthcare

Healthcare

Ergomed

Solid FY22 marked by broad-based growth

FY22 results

Healthcare services

17 April 2023

Price

1,046p

Market cap

£531m

Net cash (£m) at 31 December 2022 excluding leases

19.1

Shares in issue

50.8m

Free float

81%

Code

ERGO

Primary exchange

AIM

Secondary exchange

Frankfurt Xetra

Share price performance

%

1m

3m

12m

Abs

(2.1)

(16.6)

(23.2)

Rel (local)

(4.6)

(16.3)

(24.0)

52-week high/low

1,380p

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

H123 trading update

July 2023

H123 results

September 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

Ergomed reported FY22 results broadly in line with our expectations. Group revenues grew 22.5% y-o-y to £145.3m, underpinned by sustained demand for both the CRO and PV segments and supported by the ADAMAS acquisition and foreign exchange benefit. Adjusted EBITDA rose 11.5% y-o-y, although margins were comparatively lower (19.5% versus 21.4% in FY21) due to previously flagged incremental investments in technology and senior management hires. The order book remained robust at £295m (up 23.1% over FY21), boding well for medium-term sales potential. Year-end net cash of £19.1m was an improvement over the £12m reported in H122 (after the £24.2m net cash purchase of ADAMAS in February 2022) and, with £80m in undrawn credit facilities, Ergomed remains well-capitalised to fund future growth. We make minor adjustments to our estimates and roll forward our model. We upgrade our valuation slightly to 1,577p/share from 1,573p/share previously.

Year end

Revenue (£m)

Adjusted EBITDA* (£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/21

118.6

25.4

41.3

0.0

25.3

N/A

12/22

145.3

28.4

42.9

0.0

24.4

N/A

12/23e

158.3

31.3

45.0

0.0

23.2

N/A

12/24e

176.3

35.3

51.8

0.0

20.2

N/A

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

Steady sales growth with inorganic support

FY22 performance was broad-based, with the clinical research services (CRO) segment growing 22.9% y-o-y growth (14.7% constant exchange rate, CER) to £71.4m and the pharmacovigilance (PV) business recording 22.1% y-o-y growth (14.3% CER) to £73.9m. Both segments benefited from the integration of the ADAMAS business, which contributed £10.2m to the top line. Order book was strong at £295m (up 23.1% y-o-y), although we note the relatively lower incremental growth over the H122 figure of £284.5m.

Resilient margins despite rising overheads

Stringent cost management allowed Ergomed to maintain strong gross margins (40.7% vs 40.8% in FY21), although overall profitability was marginally affected by previously flagged investment in technology and senior hires (adjusted EBITDA margin 19.5% vs 21.4% in FY21). We expect Ergomed’s strategy to utilise technology to drive its CRO (increased use of decentralised clinical trials) and PV (improved case processing efficiency) businesses to translate into top-line growth in the medium term.

Valuation: Upgrade to £801m or 1,577p/share

We make minor adjustments to our estimates post FY22 results and roll forward our model, which results in our valuation increasing to £801m or 1,577p/share from £789m or 1,573p/share. Our valuation implies an FY23e EV/EBITDA multiple of 24.9x. Ergomed trades at a premium on FY23e consensus EV/EBITDA of 16.0x versus peers at 13.5x, thanks to its niche positioning and higher-margin profile.

FY22 update: Fundamentally strong

Broad-based growth across both segments

The 22.5% y-o-y revenue growth in FY22 (£145.3m versus £118.6m in the previous year) was driven by a combination of strong sales growth (robust order book and new business contracts), foreign exchange tailwinds (8pp) and a first-time contribution from the acquisition of ADAMAS in February 2022 (£10.2m revenue contribution, or 8.6pp). Importantly, the H222 revenue figure (£75.3m) was higher than H122, continuing the previous trend of a stronger sales performance in the second half of the year and implying business seasonality. Service fee revenue grew 24% y-o-y to £124m (85% of group revenue).

At the segment level, the CRO and PV businesses contributed almost equally to FY22 revenue (49.1% and 50.9% respectively).

Revenues in the CRO segment increased to £71.4m, up 22.9% (14.7% CER; our estimate was £69.9m), with both pass-through revenues (courtesy of the increasing US presence, contributing two-thirds of FY22 group revenue) and underlying service revenues growing. Notably, service fee revenue rose 27.3% y-o-y (18.9% CER), higher than overall segment growth and benefiting from an improved business mix, although we expect this to have been partially supported by ADAMAS, which we estimate contributed c £4m to the segment’s turnover. Excluding ADAMAS, we calculate revenue growth of 16%, driven by new contract wins from speciality pharma/biotech companies. We expect Ergomed’s focus on oncology and rare diseases to have benefited it, given that these areas are likely not as affected by the recent funding overhang impacting on development-related activities in the biotech space. For context, 20 of the 37 FDA-approved drugs in FY22 were focused on oncology and rare disease and management has communicated that more than 80% of Ergomed’s FY22 revenues were related to these target areas. The oncology and rare disease CRO market is valued at c US$20bn and, according to Ergomed, is expected to grow at a CAGR of more than 10% in the medium term.

Revenues in the PV segment increased to £73.9m (including c £6m from ADAMAS, based on our estimates), up 22.1% (14.3% CER; our estimate was £72.1m) and were underpinned by sticky customers and repeat business (with a 90% customer retention rate in the segment). According to management, the business participated in more than 290 regulatory inspections and audits in FY22, more than a 20% increase over FY21. Excluding ADAMAS, we calculate revenue growth of 12% for the segment in FY22.

The order book, a key indicator of future revenue potential, remained strong at £295.0m at end FY22, up 23.1% from £239.7m at end FY21, providing visibility into the near-term revenue stream. The growth in order book was supported by increased orders from both new and existing clients, which also reflects materialisation of cross-selling opportunities and an enhanced geographic presence for new markets including France, Italy, Romania, Portugal and Ireland. However, we note that the incremental growth in the order book over H122 (£284.5m) was a more modest 3.7%, mirroring the trend seen in H221 and indicating that new business and order bookings have been H1 weighted in recent years.

Exhibit 1: Growth in order book value

Source: Ergomed FY22 results presentation. Note: *Includes the benefit of the ADAMAS acquisition in FY22.

As noted above, sales growth was supported by foreign exchange as the company’s US-focused business benefited from appreciation in the US dollar against the local currency. North America remains the largest revenue-contributing region based on customer location (62.3% of total revenue), followed by EMEA (20.1%), the UK (13.9%) and Asia and Australia (3.6%). While US recorded revenue growth of 21.7% y-o-y, the UK grew by 42.5%, and EMEA (ex-UK) grew by 29.7%.

Stable gross margins

Ergomed posted strong gross margins in FY22 despite rising overheads (primarily headcount related in the US) – 40.7% in FY22, similar to 40.8% in FY21 – driven by stringent cost control. Gross margins from service fee revenue (which exclude pass-through revenues and are a better indicator of trading performance) were 47.7% in FY22, slightly lower than 48.4% reported in FY21. While pass-through revenues (certain costs passed through to customers but booked as Ergomed revenues at no profit) are negligible in the PV segment, their mix in the CRO segment is much higher (£20.6m vs £0.7m in the PV segment), which is reflected in the 43.5% service fee gross margin recorded by the CRO segment in FY22 vs 50.6% for the PV business. We expect this trend to continue in the forecast years, with further margin expansion opportunities arising from Ergomed’s efforts to enhance automation in the PV segment, thereby generating operational efficiencies.

EBITDA growth in line with our estimates

Ergomed reported FY22 adjusted EBITDA of £28.4m (Edison estimate: £28.1m), 11.5% growth over the FY21 figure of £25.4m, although the margin was slightly lower (19.5% vs 21.4% in FY21) due to the anticipated increase in SG&A expenses as the company invested in new technology, manpower and senior leadership hires. SG&A expenses stood at £41.5m in FY22 (including acquisition-related costs), up 17.9% from the FY21 figure of £34.9m. Ergomed had a cash balance of £19.1m by end FY22 and a debt-free balance sheet, along with undrawn revolving credit facilities worth £80m. We assess that the company remains well capitalised to fund its development and growth plans, including bolt-on acquisitions.

Strong contribution from ADAMAS

Ergomed acquired ADAMAS in February 2022 for an enterprise value of £24.2m. ADAMAS offers a full range of quality assurance services and specialises in auditing pharmaceutical manufacturing processes, clinical trials and pharmacovigilance systems, effectively expanding the scope of PV services provided by Ergomed. In FY22, ADAMAS contributed £10.2m in revenue, c £1.7m in EBITDA and £1m in reported profits to Ergomed (from 9 February to 31 December 2022). On an annualised basis, this figure stands at £10.8m and £1m for revenue and profits, respectively. Management estimates that the auditing business market is a c £1bn opportunity and the integration of ADAMAS should help Ergomed make further inroads into the target space. For FY23, management expects mid-teens growth in revenues from ADAMAS, which should support both top-line growth and margin expansion for Ergomed.

Estimate revisions

We have updated our model for the FY22 results and made small adjustments to our estimates based on FY22 performance and near-term outlook. FY22 revenues were largely in line with our estimate of £142.1m and we have therefore kept our FY23 revenue estimate unchanged at £158.3. Our revenue estimate for FY23 includes contributions of £79.1m and £79.2m from the CRO and PV segments, respectively. We also introduce FY24 estimates, projecting revenues to rise to £176.3m during the year. we have also kept out FY23 operating expense estimates broadly unchanged (highlighted in Exhibit 2 below). We forecast end-FY23 net cash of £41m, supported by the strong top line and operating performance.

Exhibit 2: Key changes to forecasts

FY22

FY23e

FY24e

Estimated

Actual

Change (%)

Old

New

Change (%)

New

Total revenues

142.1

145.3

2.2%

158.3

158.3

0.0%

176.3

– PrimeVigilance

72.1

73.9

2.4%

79.3

79.2

-0.1%

88.0

– CRO

69.9

71.4

2.1%

79.0

79.1

0.1%

88.3

O/W pass-through

19.8

20.6

4.0%

21.3

21.7

1.5%

22.6

Gross profit

59.0

59.1

0.3%

66.1

66.1

0.0%

73.4

Gross margin

41.5%

40.7%

(0.8) pp

41.7%

41.7%

0.0 pp

41.7%

Adjusted EBITDA

28.1

28.4

0.8%

31.4

31.3

-0.2%

35.3

Adjusted EBITDA margin

19.8%

19.5%

(0.3) pp

19.8%

19.8%

0.0 pp

20.0%

Adjusted EBIT

22.5

21.5

-4.3%

26.0

25.9

-0.1%

28.9

Adjusted EBIT margin

15.8%

14.8%

(1.0) pp

16.4%

15.7%

0.0 pp

16.4%

Adjusted EPS (p)

40.4

42.9

6.1%

44.9

45.0

-0.8%

51.8

Source: Ergomed company filings, Edison Investment Research

Valuation

After adjusting our estimates and rolling forward our model, we increase our valuation of Ergomed slightly to £801m or 1,577p/share from £789m or 1,573p/share previously. This is derived from our DCF model using a 10% discount rate and 2% terminal growth rate. Our valuation implies an EV/EBITDA multiple of 24.9x based on our FY23 forecasts. We note that Ergomed trades at a premium on FY23e consensus EV/EBITDA of 16.0x compared to the peer average of 13.5x, which can be attributed to its niche positioning and higher-margin profile versus peers.

Exhibit 3: Ergomed base case DCF model

£'000s

2023e

2024e

2025e

2026e

2027e

2028e

2029e

2030e

Revenue

158,327

176,284

196,862

226,391

260,067

298,427

342,071

391,672

Growth (%)

11.3%

11.7%

15.0%

14.9%

14.8%

14.6%

14.5%

Adjusted EBITDA

31,338

35,316

39,680

49,806

61,116

74,607

90,649

109,668

Margin (%)

19.8%

20.0%

20.2%

22.0%

23.5%

25.0%

26.5%

28.0%

Tax

(5,089)

(5,578)

(6,432)

(7,697)

(9,297)

(11,191)

(13,426)

(16,059)

rate (%)

-20%

-20%

-20%

-20%

-20%

-20%

-20%

-20%

Working capital

(1,365)

(1,144)

(2,417)

(2,296)

(2,181)

(2,072)

(1,969)

(1,870)

Capex*

(3,000)

(3,000)

(3,000)

(2,850)

(2,708)

(2,572)

(2,444)

(2,321)

Free cash flow

21,884

25,594

27,832

36,963

46,930

58,771

72,811

89,418

Value (£m)

Value/share (p)

DCF for forecast period (2023 to 2025)

63.7

125.5

DCF for transition period (2026 to 2030)

171.3

337.3

Terminal value

546.6

1,076.6

Enterprise value

781.6

1,539.3

Net cash at end December 2022

19.1

37.6

Equity value

800.7

1,576.9

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)

2023e

2024e

2025e

2023e

2024e

2025e

2023e

2024e

2025e

Ergomed*

1046p

£512m

16.0x

14.2x

12.6x

3.2x

2.9x

2.6x

23.1x

20.4x

17.7x

Syneos Health

$40.2

$6,721m

9.8x

8.7x

8.1x

1.3x

1.3x

1.3x

12.2x

10.2x

9.1x

ICON

$209.8

$21,508m

13.0x

12.0x

10.9x

2.6x

2.5x

2.3x

16.6x

14.4x

12.4x

Medpace

$192.1

$5,938m

17.8x

15.6x

13.9x

3.5x

3.1x

2.7x

24.8x

21.2x

18.0x

Average

13.5x

12.1x

11.0x

2.5x

2.3x

2.1x

17.8x

15.3x

13.2x

Source: Edison Investment Research, Refinitiv. Note: *Edison estimates. Prices at 14 April 2023.

Exhibit 5: Financial summary

Accounts: IFRS, year end 31 December (£000s)

2020

2021

2022

2023e

2024e

INCOME STATEMENT

 

 

 

 

 

Total revenues

86,391

118,581

145,262

158,327

176,284

Cost of sales

(38,686)

(52,191)

(64,712)

(69,822)

(79,328)

Reimbursable expenses

(8,055)

(18,028)

(21,405)

(22,438)

(23,516)

Gross profit

39,650

48,362

59,145

66,067

73,440

Gross margin %

46%

40.8%

40.7%

41.7%

41.7%

SG&A (expenses)

(27,518)

(34,877)

(41,506)

(40,498)

(45,427)

R&D costs

(152)

(130)

(121)

(122)

(123)

Other income/(expense)

1,554

1,269

1,355

0

0

Exceptionals and adjustments

993

5,753

3,598

500

1,000

Reported EBITDA

18,378

19,670

24,711

30,838

34,316

Depreciation and amortisation

4,844

5,046

5,838

5,392

6,426

Reported EBIT

13,534

14,624

18,873

25,446

27,890

Finance income/(expense)

(395)

(360)

0

0

0

Other income/(expense)

(511)

0

0

0

0

Reported PBT

12,628

14,264

17,953

25,446

27,890

Income tax expense (includes exceptionals)

(2,946)

(1,590)

(2,971)

(5,089)

(5,578)

Reported net income

9,682

12,674

14,982

20,357

22,312

Basic average number of shares, m

48.3

48.5

49.8

50.8

50.8

Basic EPS (p)

20.0

26.2

30.1

40.1

43.9

Adjusted EBITDA

19,371

25,423

28,356

31,338

35,316

Adjusted EBIT

14,527

20,166

21,544

25,946

28,890

Adjusted PBT

14,442

21,616

24,314

27,946

31,890

Adjusted EPS (p)

23.8

41.3

42.9

45.0

51.8

Adjusted diluted EPS (p)

22.8

39.6

41.6

44.5

51.2

Order book

1,93,000

2,39,700

2,95,000

3,37,715

3,65,068

BALANCE SHEET

 

 

 

 

 

Property, plant and equipment

1,742

1,966

2,466

2,074

1,647

Right-of-use assets

4,715

2,691

2,864

2,864

2,864

Goodwill

24,605

23,903

41,404

41,404

41,404

Intangible assets

9,618

7,653

15,844

13,844

10,844

Other non-current assets

4,898

9,433

8,530

8,530

8,530

Total non-current assets

45,578

45,646

71,108

68,716

65,289

Cash and equivalents

18,994

31,243

19,096

40,980

66,574

Trade and other receivables

22,224

25,143

34,450

37,304

41,052

Other current assets

5,553

3,958

4,695

4,695

4,695

Total current assets

46,771

60,344

58,241

82,979

1,12,322

Lease liabilities

3,128

1,432

1,672

1,672

1,672

Long term debt

0

0

0

0

0

Other non-current liabilities

2,743

1,939

4,035

4,035

4,035

Total non-current liabilities

5,871

3,371

5,707

5,707

5,707

Trade and other payables

15,702

15,207

17,640

19,129

21,734

Lease liabilities

1,978

1,249

1,236

1,236

1,236

Other current liabilities

15,932

18,924

20,017

20,017

20,017

Total current liabilities

33,612

35,380

38,893

40,382

42,987

Equity attributable to company

52,866

67,239

84,749

1,05,606

1,28,917

CASH FLOW STATEMENT

 

 

 

 

 

Profit before tax

12,628

14,264

17,953

25,446

27,890

Cash from operations (CFO)

18,048

18,683

14,849

24,884

28,594

Capex

(974)

(983)

(1,916)

(3,000)

(3,000)

Acquisitions & disposals net

(11,985)

103

(24,211)

0

0

Other investing activities

183

(3,266)

23

0

0

Cash used in investing activities (CFIA)

(12,776)

(4,146)

(26,104)

(3,000)

(3,000)

Net proceeds from issue of shares

1,869

546

472

0

0

Movements in debt

0

0

0

0

0

Other financing activities

(2,346)

(2,660)

(2,845)

0

0

Cash from financing activities (CFF)

(477)

(2,114)

(2,373)

0

0

Increase/(decrease) in cash and equivalents

4,795

12,423

(13,628)

21,884

25,594

Currency translation differences and other

(60)

(175)

1,481

0

0

Cash and equivalents at start of period

14,259

18,995

31,243

19,096

40,980

Cash and equivalents at end of period

18,995

31,243

19,096

40,980

66,574

Net (debt)/cash

18,993

31,243

19,096

40,980

66,574

Source: Ergomed accounts, Edison Investment Research

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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.

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London │ New York │ Frankfurt

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London, WC1R 4PS

United Kingdom

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Copyright: Copyright 2023 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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Regional REIT (RGL) delivered a good income performance in FY22, led by strong leasing (well above pre-pandemic levels) and continued strong rent collection. DPS of 6.6p was fully covered and we forecast the same for FY23. Market-wide valuation yield widening reduced NAV and increased gearing, but RGL notes that it has ample headroom available across its debt facilities, which are fixed at a cost of 3.5%. In this note we explain why we think DPS is sustainable and review some of the key issues that appear to be weighing on the valuation.

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