Ergomed — Healthy CRO segment rebound confirmed

Ergomed (AIM: ERGO)

Last close As at 17/07/2024

1,042.00

−16.00 (−1.51%)

Market capitalisation

529m

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Research: Healthcare

Ergomed — Healthy CRO segment rebound confirmed

Ergomed released its 2021 trading update. Total 2021 revenues are expected to be approximately £118.6m, up 37.3% y-o-y (our and the consensus estimate was £119.6m), despite continuing FX headwinds (at constant exchange rates, CER, the growth is expected to be 44.3%). Revenues in the CRO segment increased to £58.1m, up 85.6% (97.4% CER; our estimate was £56.0m) indicating a good rebound in the CRO services industry after it was affected by the COVID-19 pandemic in 2020. Revenues in the PrimeVigilance segment increased to £60.5m, up 9.8% (14.2% CER; our estimate was £63.6m). Ergomed expects adjusted EBITDA to be ‘ahead of current market expectations’. Our 2021 adjusted EBITDA stands at £24.0m, marginally above the consensus £23.4m. We therefore keep our estimates and valuation of £751m (1,536p/share) unchanged ahead of the full results.

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Healthcare

Ergomed

Healthy CRO segment rebound confirmed

H221 trading update

Healthcare services

03 February 2022

Price

1,130p

Market cap

£555m

Net cash (£m) at end-2021

31.2

Shares in issue

49.1m

Free float

80%

Code

ERGO

Primary exchange

AIM

Secondary exchange

Frankfurt Xetra

Share price performance

%

1m

3m

12m

Abs

(24.7)

(18.7)

3.2

Rel (local)

(25.5)

(20.8)

(10.1)

52-week high/low

1,540p

1060p

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 services through its PrimeVigilance division. Ergomed is predominantly focused on oncology, orphan drugs, rare diseases and pharmacovigilance.

Next events

H221 results

March 2022

Additional bolt-on acquisitions

2021/22

Analysts

Dr Jonas Peciulis

+44 (0)20 3077 5728

Dr Sean Conroy

+44 (0)20 3077 5700

Ergomed is a research client of Edison Investment Research Limited

Ergomed released its 2021 trading update. Total 2021 revenues are expected to be approximately £118.6m, up 37.3% y-o-y (our and the consensus estimate was £119.6m), despite continuing FX headwinds (at constant exchange rates, CER, the growth is expected to be 44.3%). Revenues in the CRO segment increased to £58.1m, up 85.6% (97.4% CER; our estimate was £56.0m) indicating a good rebound in the CRO services industry after it was affected by the COVID-19 pandemic in 2020. Revenues in the PrimeVigilance segment increased to £60.5m, up 9.8% (14.2% CER; our estimate was £63.6m). Ergomed expects adjusted EBITDA to be ‘ahead of current market expectations’. Our 2021 adjusted EBITDA stands at £24.0m, marginally above the consensus £23.4m. We therefore keep our estimates and valuation of £751m (1,536p/share) unchanged ahead of the full results.

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

66.4

N/A

12/20

86.4

19.4

23.7

0.0

55.5

N/A

12/21e

119.6

24.0

34.1

0.0

38.6

N/A

12/22e

136.9

27.9

40.5

0.0

32.5

N/A

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

CRO segment rebound

Revenues in the CRO segment include the first full year of US-based MedSource performance since Ergomed acquired it in December 2020. Excluding MedSource (ie like-for-like) the growth was 26.2% (33.4% CER). This marks a significant rebound in CRO service demand, which was dampened across the industry during the first part of the COVID-19 pandemic (in 2020 CRO like-for-like performance was flat year-on-year). At that time the widespread restrictions disrupted clinical trials causing delays and affecting service providers. Ergomed’s key markets are the US and Europe, where vaccine deployment has been relatively efficient, which is the reason for the strong rebound we now see in Ergomed’s CRO division.

Adj EBITDA ‘ahead of current market expectations’

The total order book across both segments is expected to be approximately £240m at end-2021, up 24.2% y-o-y, which gives good visibility of contracted revenues for 2022 and beyond. Cash and equivalent balances were £31.2m at end-2021 and the company still has access to banking facilities of £30.0m if needed. Profits will be released in the full report expected in March 2022, but Ergomed has indicated that it expects 2021 adjusted EBITDA to be ahead of current market expectations.

Valuation: £751m or 1,536p/share

We keep our estimates unchanged as our adjusted EBITDA is already (albeit marginally) above the consensus. We keep our DCF-based valuation unchanged at £751m or 1,536p/share, which implies an EV/EBITDA multiple of 30.0x (FY21e). Ergomed trades at a modest premium on FY22e EV/EBITDA (cons.) of 20.3x vs the peer average of 17.5x. Flexing our DCF assumptions (long-term sales growth and profit margins), our bull case stands at 2,086p/share and our bear case at 1,072p/share (details in our Outlook report).

Ergomed DCF model and forecast multiples

Exhibit 1: Ergomed base case DCF model

£'000s

2021e

2022e

2023e

2024e

2025e

2026e

2027e

2028e

2029e

2030e

Revenue

119,600

136,877

161,301

187,109

215,487

246,374

279,634

315,054

352,336

391,093

Growth (%)

38.4%

14.4%

17.8%

16.0%

15.2%

14.3%

13.5%

12.7%

11.8%

11.0%

Adj. EBIT

19,829

23,740

30,709

37,422

44,893

53,381

62,918

73,513

85,148

97,773

Margin (%)

16.6%

17.3%

19.0%

20.0%

20.8%

21.7%

22.5%

23.3%

24.2%

25.0%

Tax

(3,536)

(4,279)

(5,603)

(6,932)

(8,325)

(9,908)

(11,689)

(13,668)

(15,843)

(18,205)

Rate (%)

-19%

-19%

-19%

-19%

-19%

-19%

-19%

-19%

-19%

-19%

D&A

4,150

4,150

4,150

4,150

4,150

4,150

4,150

4,150

4,150

4,150

Working capital

(3,226)

(1,388)

(2,541)

(2,415)

(2,377)

(2,677)

1,283

2,963

4,095

4,639

Capex

(3,550)

(3,550)

(3,550)

(1,733)

(649)

(893)

(771)

(832)

(802)

(817)

Operating free cash flow

13,668

18,674

23,165

30,492

37,692

44,053

55,891

66,126

76,748

87,540

Value

Value/share

DCF for forecast period (2021 to 2023)

48.6

99p

DCF for transition period (2023 to 2030)

209.2

428p

Terminal value

461.9

945p

Enterprise value

719.7

1,472p

Net cash, FY21e

31.4

64p

Equity value

751.2

1,536p

Source: Edison Investment Research. Note: 10% WACC.

Exhibit 2: Ergomed comparable companies

Company

Price

Market cap

EV/EBITDA (x)

EV/sales (x)

P/E (x)

2021e

2022e

2023e

2021e

2022e

2023e

2021e

2022e

2023e

Ergomed*

1,130p

£555m

21.8x

18.8x

15.0x

4.4x

3.8x

3.2x

34.4x

28.9x

22.5x

Syneos

$96.0

$8,947m

15.4x

13.7x

12.2x

2.2x

2.1x

1.9x

19.6x

16.9x

14.7x

ICON

$281.5

$20,381m

26.4x

18.3x

16.5x

4.6x

3.2x

3.0x

25.9x

21.5x

18.6x

Medpace

$195.2

$6,032m

25.6x

20.6x

17.5x

4.9x

3.9x

3.4x

35.3x

30.6x

26.3x

Average

22.5x

17.5x

15.4x

3.9x

3.1x

2.7x

26.9x

23.0x

19.8x

Source: Edison Investment Research, Refinitiv. Note: *Edison estimates. We note the merger of ICON and PRA Health Sciences announced on 24 February 2021. Prices at 26 January 2022.

Exhibit 3: Financial summary

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

2019

2020

2021e

2022e

2023e

INCOME STATEMENT

 

 

 

 

Total revenues

68,255

86,391

119,600

136,877

161,301

Cost of sales

(29,790)

(38,686)

(58,600)

(59,131)

(69,682)

Reimbursable expenses

(8,940)

(8,055)

(22,650)

(16,379)

(18,967)

Gross profit

29,525

39,650

54,120

61,367

72,651

Gross margin %

43%

46%

45%

45%

45%

SG&A (expenses)

(23,513)

(27,803)

(35,064)

(38,396)

(42,708)

R&D costs

(545)

(152)

(203)

(207)

(211)

Other income/(expense)

51

1,839

0

0

0

Exceptionals and adjustments

3,265

993

976

976

976

Reported EBITDA

9,230

18,378

23,003

26,914

33,883

Depreciation and amortisation

3,712

4,844

4,150

4,150

4,150

Reported EBIT

5,518

13,534

18,853

22,764

29,733

Finance income/(expense)

(245)

(395)

(245)

(245)

(245)

Other income/(expense)

(286)

(511)

0

0

0

Reported PBT

4,987

12,628

18,608

22,519

29,488

Income tax expense (includes exceptionals)

583

(2,936)

(3,536)

(4,279)

(5,603)

Reported net income

5,570

9,692

15,073

18,241

23,885

Basic average number of shares, m

46.6

48.5

48.9

48.9

48.9

Basic EPS (p)

12.0

20.0

30.8

37.3

48.9

Adjusted EBITDA

12,495

19,371

23,979

27,890

34,859

Adjusted EBIT

8,783

14,527

19,829

23,740

30,709

Adjusted PBT

8,637

14,442

20,184

24,095

31,064

Adjusted EPS (p)

19.8

23.7

34.1

40.5

52.1

Adjusted diluted EPS (p)

19.8

22.7

32.8

39.1

50.2

Order book

124,100

193,000

246,902

276,736

423,642

BALANCE SHEET

 

 

Property, plant and equipment

1,110

1,742

1,742

1,742

1,742

Right-of-use assets

5,171

4,715

4,715

4,715

4,715

Goodwill

13,380

24,605

24,605

24,605

24,605

Intangible assets

2,755

9,618

9,018

8,418

7,818

Other non-current assets

2,616

4,310

4,310

4,310

4,310

Total non-current assets

25,032

44,990

44,390

43,790

43,190

Cash and equivalents

14,259

18,994

31,440

48,892

70,836

Trade and other receivables

14,359

22,224

27,852

32,821

40,310

Other current assets

3,382

7,009

7,009

7,009

7,009

Total current assets

32,000

48,227

66,301

88,723

118,156

Lease liabilities

3,716

3,128

3,128

3,128

3,128

Long term debt

0

0

0

0

Other non-current liabilities

635

2,529

2,529

2,529

2,529

Total non-current liabilities

4,351

5,657

5,657

5,657

5,657

Trade and other payables

10,373

15,702

18,104

21,685

26,633

Lease liabilities

1,718

1,978

1,978

1,978

1,978

Other current liabilities

3,770

17,388

17,388

17,388

17,388

Total current liabilities

15,861

35,068

37,470

41,051

45,999

Equity attributable to company

36,820

52,492

67,565

85,805

109,690

CASH FLOW STATEMENT

 

 

Profit before tax

4,987

12,628

18,608

22,519

29,488

Cash from operations (CFO)

11,788

18,084

15,997

21,003

25,494

Capex

(996)

(974)

(3,550)

(3,550)

(3,550)

Acquisitions & disposals net

(107)

(11,969)

0

0

0

Other investing activities

(1,728)

0

0

0

0

Cash used in investing activities (CFIA)

(2,831)

(12,760)

(3,550)

(3,550)

(3,550)

Net proceeds from issue of shares

1,427

(157)

0

0

0

Movements in debt

(1,677)

(2,189)

0

0

0

Other financing activities

0

0

0

0

0

Cash from financing activities (CFF)

(250)

(477)

0

0

0

Increase/(decrease) in cash and equivalents

8,707

4,847

12,447

17,453

21,944

Currency translation differences and other

363

(113)

0

0

0

Cash and equivalents at start of period

5,189

14,259

18,993

31,440

48,892

Cash and equivalents at end of period

14,259

18,993

31,440

48,892

70,836

Net (debt)/cash

14,259

18,993

31,440

48,892

70,836

Source: Ergomed accounts, Edison Investment Research


General disclaimer and copyright

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 £60,000 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.

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.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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General disclaimer and copyright

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 £60,000 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.

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.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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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.

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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Research: Real Estate

Target Healthcare REIT — Capital deployment and positive returns

Target healthcare REIT has fully deployed the proceeds of the September equity raise, including the acquisition of a significant portfolio of modern, purpose-built homes with a well-established trading record. Enhanced by the recent £100m long-term fixed rate institutional debt facility, remaining capital resources are fully allocated to an identified pipeline of further opportunities. Meanwhile, the Q222 report shows continuing positive accounting returns, driven by inflation-linked rental uplifts.

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