Ergomed — Transformative 2020; solid fundamentals for 2021

Ergomed (AIM: ERGO)

Last close As at 20/06/2024

1,042.00

−16.00 (−1.51%)

Market capitalisation

529m

More on this equity

Research: Healthcare

Ergomed — Transformative 2020; solid fundamentals for 2021

Ergomed’s FY20 results released today showed that adjusted EBITDA of £19.4m was 4.2% ahead of our estimate. This was a positive surprise after we had increased it following the trading update in January 2021. Management has maintained its near-term guidance therefore we keep our estimates unchanged. A strong order book (£193m, up 55.5% from the end of FY19), continued overall business growth and a strong balance sheet positions Ergomed for another solid year of growth. Cash of £19.0m and access to unutilised credit facilities of £30m mean that the company can invest in organic growth and look for additional strategic acquisitions. We have increased our valuation to £682m or 1,400p/share.

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Healthcare

Ergomed

Transformative 2020; solid fundamentals for 2021

FY20 results

Healthcare services

23 March 2021

Price

1,239p

Market cap

£602m

Net cash (£m) at end FY20

19.0

Shares in issue

48.4m

Free float

78%

Code

ERGO

Primary exchange

AIM

Secondary exchange

Frankfurt (Xetra)

Share price performance

%

1m

3m

12m

Abs

(0.8)

21.8

242.9

Rel (local)

(2.7)

16.0

153.7

52-week high/low

1,295p

320p

Business description

Ergomed is a global full-service contract research outsourcing (CRO) business with a core focus on the US and EU. It provides Phase I–III clinical services in addition to post-marketing pharmacovigilance (PV) services through its PrimeVigilance division. Ergomed is predominantly focused on oncology, orphan drugs, rare diseases and pharmacovigilance.

Next event

H121 trading update

July 2021

Analyst

Dr Jonas Peciulis

+44 (0)20 3077 5728

Ergomed is a research client of Edison Investment Research Limited

Ergomed’s FY20 results released today showed that adjusted EBITDA of £19.4m was 4.2% ahead of our estimate. This was a positive surprise after we had increased it following the trading update in January 2021. Management has maintained its near-term guidance therefore we keep our estimates unchanged. A strong order book (£193m, up 55.5% from the end of FY19), continued overall business growth and a strong balance sheet positions Ergomed for another solid year of growth. Cash of £19.0m and access to unutilised credit facilities of £30m mean that the company can invest in organic growth and look for additional strategic acquisitions. We have increased our valuation to £682m or 1,400p/share.

Year end

Revenue (£m)

Adjusted EBITDA* (£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/19

68.3

12.5

19.8

0.0

N/M

N/A

12/20

86.4

19.4

23.7

0.0

N/M

N/A

12/21e

119.6

21.7

30.4

0.0

39.4

N/A

12/22e

136.8

23.2

36.0

0.0

33.4

N/A

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

Adjusted EBITDA slightly better; maintain estimates

Top line numbers were released with the trading update in January 2021, which we reflected in our last update. Today’s full year results showed that FY20 gross profit increased to £39.7m from £29.5m, with gross margin improving to 45.9% from 43.3%. FY20 adjusted EBITDA increased to £19.4m from £12.5m in FY19 and was slightly better than our estimate of £18.6m (which we increased after the trading update in January). Adjusted FY20 EPS increased by 29.6% y-o-y. We keep our 2021 revenue estimates (PV £63.6m; CRO £56.0m) and our 2021 adjusted EBITDA is unchanged at £21.7m. The order book was strengthened by organic growth, but also by the newly acquired businesses, ending at an all-time high of £193m providing good visibility into 2021.

A transformative 2020

While most of 2020 was a challenging year for the CRO sector, for Ergomed it was a transformative growth period due to well-balanced pharmacovigilance and CRO offerings. CRO revenues were flat at £31.3m (but service fees were up 13.5% in H220 versus H120). But this was more than offset by 30% like-for-like growth in PV revenues to £46m (or 55.6% to £55.1m if we include the acquisition of Ashfield Pharmacovigilance, now PrimeVigilance USA). The acquisition of US-based CRO MedSource in December 2020 will also significantly add to the 2021 top line and further expand Ergomed’s presence in the United States.

Valuation: £682m or 1,400p/share

We increase our valuation to £682m or 1,400p/share from £501m or 1,113p/share previously. Our valuation is now based on a DCF model using a 10% discount rate and 2% terminal growth rate (Exhibit 2). We believe average peer multiples are significantly undervaluing Ergomed, given its continued high growth rates relative to average growth of peers. The H121 trading update, which is the next catalyst, will be released in July 2021.

Strong fundamentals for a solid 2021

Ergomed had cash of £19.0m and was debt free at the end of FY20, which is impressive considering the company made two acquisitions in 2020 with cash outflows totalling £12m. We note that Ergomed consolidated MedSource in December 2020 and the initial cash outlay was £5.2m. Following the cash outlay of £8.1m for the Ashfield PV acquisition in January 2020, this indicates that underlying organic cash generation was a healthy £18m in FY20, representing strong cash conversion. In addition, the company has access to £30m in unused credit facilities.

We have switched our valuation method from relative to DCF-based. Considering our long-term forecasts as shown in Exhibit 2 and using a 10% discount rate (2% terminal growth rate), we have increased our valuation to £682m or 1,400p/share, compared to £501m or 1,113p/share.

Ergomed has demonstrated growth rates (2017–20 CAGR of 22.0%) that are higher than the average growth of the peer group companies, which we previously used for relative valuation (Exhibit 3). Ergomed is still significantly smaller than the rest of its peers and is also differentiated (focused on orphan drug development). Medpace, which is the smallest company in the peer group, has demonstrated an even higher CAGR in revenues of 28.5% over the same period. Medpace’s FY21e EV is around seven times larger than Ergomed’s, which indicates that much larger CROs can sustain high growth rates. For these reasons, we believe Ergomed can sustain higher growth rates and slightly better margins over our projected period in the DCF model. We note that consolidation is also widespread within the CRO industry, with the latest example being the merger of ICON and PRA Health Sciences announced on 24 February 2021.

Exhibit 1: Key changes to forecasts

£m

FY20

FY21e

FY22e

Estimate

Actual

Change (%)

Old

New

Change (%)

New

Total revenues

86.4

86.4

0.0%

119.6

119.6

0.0%

136.8

– PrimeVigilance

55.1

55.1

0.0%

63.6

63.6

0.0%

73.6

– CRO

31.3

31.3

0.1%

56.0

56.0

0.0%

63.3

Adjusted EBITDA

18.6

19.4

4.2%

21.7

21.7

0.0%

23.2

Adj. EBITDA margin

21.5%

22.4%

0.9pp

18.2%

18.2%

0.0pp

17.0%

Adjusted EBIT

14.4

14.5

0.6%

18.1

17.6

-2.6%

19.0

Adj. EBIT margin

16.7%

16.8%

0.1pp

15.1%

14.7%

-0.4pp

13.9%

Adjusted EPS (p)

24.3

23.7

-2.4%

33.4

30.4

-8.8%

36.0

Source: Ergomed H120 trading update, Edison Investment Research

Exhibit 2: DCF valuation

£000’s

2021e

2022e

2023e

2024e

2025e

2026e

2027e

2028e

2029e

2030e

Revenues

119,600

136,813

161,312

188,265

216,389

248,795

282,065

318,913

358,712

400,739

Revenue growth (%)

14.4%

17.9%

16.7%

14.9%

15.0%

13.4%

13.1%

12.5%

11.7%

Gross profit (%)

44.8%

43.9%

45.2%

46.6%

47.2%

47.9%

48.6%

49.0%

49.4%

49.0%

EBIT

16,619

18,073

27,570

38,794

48,405

60,181

67,525

77,884

89,319

98,221

EBIT (%)

13.9%

13.2%

17.1%

20.6%

22.4%

24.2%

23.9%

24.4%

24.9%

24.5%

Tax

-3,158

-3,434

-5,238

-7,371

-9,197

-11,434

-12,830

-14,798

-16,971

-18,662

D&A

4,150

4,150

4,150

4,150

4,150

4,150

4,150

4,150

4,150

4,150

Change in WC

-3,371

2,267

-2,532

-3,546

-534

411

1,540

108

1,595

2,368

Capex

-3,550

-3,550

-3,550

-3,550

-3,550

-3,550

-3,550

-3,550

-3,550

-3,550

Operating FCF

10,690

17,506

20,400

28,477

39,274

49,757

56,835

63,794

74,543

82,527

NPV (£m)

Free cash flows FY21–30e

238,714

Terminal value (2.0% growth rate assumed)

414,132

Enterprise value

652,847

Net cash (end-FY21)

29,485

Valuation

682,331

Valuation/share (p)

1,400

Discount rate

10.0%

Tax rate (long term)

19%

Source: Edison Investment Research; WC = working capital; FCF = free cash flows

Exhibit 3: Comparable companies

EV ($m)

EV/EBITDA (x)

EV/sales (x)

P/E (x)

P/book (x)

EBIT%

CAGR (%) 2017–2021

FY21e

Syneos Health

10,633

13.9

2.0

17.9

2.4

6.7%

18.2%

PRA Health Sciences

10,304

17.4

2.9

25.4

6.1

9.5%

12.1%

ICON

9,160

15.1

2.7

22.2

5.2

14.1%

16.7%

Medpace

5,474

25.1

4.8

36.8

6.6

18.0%

28.5%

Average

8,893

17.9

3.1

25.6

5.1

Ergomed

781

26.0

4.7

39.4

8.9

16.8%

22.0%

Diff%

45.6%

51.6%

54.0%

75.6%

Source: Refinitiv. Priced at close, 19 March 2021. Note: ICON and PRA Health Sciences announced a merger On 24 February 2021.


Exhibit 4: Financial summary

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

2018

2019

2020

2021e

2022e

INCOME STATEMENT

 

 

 

 

 

Total revenues

54,112

68,255

86,391

119,600

136,813

Cost of sales

(26,788)

(29,790)

(38,686)

(59,198)

(76,176)

Reimbursable expenses

(8,070)

(8,940)

(8,055)

(22,650)

(24,371)

Gross profit

19,254

29,525

39,650

53,522

60,035

Gross margin %

36%

43%

46%

45%

44%

SG&A (expenses)

(28,152)

(23,513)

(27,803)

(36,700)

(41,755)

R&D costs

(1,578)

(545)

(152)

(203)

(207)

Other income/(expense)

30

51

1,839

0

0

Exceptionals and adjustments

10,165

3,265

993

976

976

Reported EBITDA

(7,912)

9,230

18,378

20,769

22,223

Depreciation and amortisation

2,534

3,712

4,844

4,150

4,150

Reported EBIT

(10,446)

5,518

13,534

16,619

18,073

Finance income/(expense)

(599)

(245)

(395)

(245)

(245)

Other income/(expense)

277

(286)

(511)

0

0

Reported PBT

(10,768)

4,987

12,628

16,374

17,828

Income tax expense (includes exceptionals)

(89)

583

(2,936)

(3,111)

(1,867)

Reported net income

(8,980)

5,570

9,692

13,263

15,961

Basic average number of shares, m

44.7

46.6

48.5

48.7

48.7

Basic EPS (p)

(20.1)

12.0

20.0

27.2

32.7

 

Adjusted EBITDA

2,253

12,495

19,371

21,745

23,199

Adjusted EBIT

(281)

8,783

14,527

17,595

19,049

Adjusted PBT

960

8,637

14,442

17,950

19,404

Adjusted EPS (p)

1.9

19.8

23.7

30.4

36.0

Adjusted diluted EPS (p)

1.9

19.8

22.7

29.3

34.6

Order book

109,200

124,100

193,000

246,902

274,995

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

Property, plant and equipment

1,344

1,110

1,742

1,742

1,742

Right-of-use assets

-

5,171

4,715

4,715

4,715

Goodwill

13,659

13,380

24,605

24,605

24,605

Intangible assets

3,740

2,755

9,618

9,018

8,418

Other non-current assets

2,646

2,616

4,310

4,310

4,310

Total non-current assets

21,389

25,032

44,990

44,390

43,790

Cash and equivalents

5,189

14,259

18,994

29,485

48,313

Trade and other receivables

16,429

14,359

22,224

30,767

36,123

Other current assets

3,857

3,382

7,009

7,009

7,009

Total current assets

25,475

32,000

48,227

67,261

91,445

Lease liabilities

0

3,716

3,128

3,128

3,128

Long term debt

0

0

0

Other non-current liabilities

1,314

635

2,529

2,529

2,529

Total non-current liabilities

1,314

4,351

5,657

5,657

5,657

Trade and other payables

10,989

10,373

15,702

20,874

28,497

Lease liabilities

0

1,718

1,978

1,978

1,978

Other current liabilities

6,192

3,770

17,388

17,388

17,388

Total current liabilities

17,187

15,861

35,068

40,240

47,863

Equity attributable to company

28,363

36,820

52,492

65,755

81,716

 

 

 

 

 

CASH FLOW STATEMENT

 

 

 

 

Profit before tax

(10,768)

4,987

12,628

16,374

17,828

Cash from operations (CFO)

1,044

11,788

18,084

14,042

22,378

Capex

(1,587)

(996)

(974)

(3,550)

(3,550)

Acquisitions & disposals net

(398)

(107)

(11,969)

0

0

Other investing activities

(751)

(1,728)

0

0

0

Cash used in investing activities (CFIA)

(2,736)

(2,831)

(12,760)

(3,550)

(3,550)

Net proceeds from issue of shares

3,790

1,427

(157)

0

0

Movements in debt

(12)

(1,677)

(2,189)

0

0

Other financing activities

(4)

0

0

0

0

Cash from financing activities (CFF)

3,774

(250)

(477)

0

0

Increase/(decrease) in cash and equivalents

2,082

8,707

4,847

10,492

18,828

Currency translation differences and other

(111)

363

(113)

0

0

Cash and equivalents at start of period

3,218

5,189

14,259

18,993

29,485

Cash and equivalents at end of period

5,189

14,259

18,993

29,485

48,313

Net (debt)/cash

5,189

14,259

18,994

29,485

48,313

Source: Ergomed accounts, Edison Investment Research

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This report has been commissioned by Ergomed and prepared and issued by Edison, in consideration of a fee payable by Ergomed. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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This report has been commissioned by Ergomed and prepared and issued by Edison, in consideration of a fee payable by Ergomed. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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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.

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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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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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The Scottish Investment Trust — Portfolio reset for a ‘multi-year recovery’ ahead

The Scottish Investment Trust (SCIN) seeks to provide investors with above-average long-term returns, by investing in undervalued international companies. The trust also targets regular dividend growth ahead of UK inflation. SCIN’s team, led by manager Alasdair McKinnon, are contrarian, value-focused investors who believe the market is significantly underestimating the strength of the post-pandemic recovery and its capacity to support cyclical and value-type stocks. In February, he revamped the portfolio to take advantage of what he sees as the many ‘tremendous opportunities’ among unloved areas of the market that he believes will benefit from the multi-year economic rebound he foresees. There are very early signs that these changes are having a positive impact on performance (see chart).

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