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Research: Healthcare
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.
Written by
Jonas Peciulis
Ergomed |
Transformative 2020; solid fundamentals for 2021 |
FY20 results |
Healthcare services |
23 March 2021 |
Share price performance
Business description
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Analyst
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* |
DPS |
P/E |
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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