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GBP523m
Research: Healthcare
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.
Ergomed |
Solid FY22 marked by broad-based growth |
FY22 results |
Healthcare services |
17 April 2023 |
Share price performance
Business description
Next events
Analysts
Ergomed is a research client of Edison Investment Research Limited |
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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* |
DPS |
P/E |
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
|
|
Research: Real Estate
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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