Ergomed — Momentum continues with EBITDA upgrades

Ergomed (AIM: ERGO)

Last close As at 28/03/2024

1,042.00

−16.00 (−1.51%)

Market capitalisation

529m

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Research: Healthcare

Ergomed — Momentum continues with EBITDA upgrades

Ergomed’s H121 trading update highlights that operational momentum continues to be strong following its stellar performance in FY20. The order book continues to grow at an impressive rate, up 18% from end-2020 with a strong 1.62x book-to-bill ratio for the period. We maintain our FY21 revenue forecast, in line with company guidance, which assumes no additional FX headwinds, but note that this could mean our FY22 revenue forecast is conservative. With acquisition synergies being realised faster than expected, we adjust our near-term margin assumptions, somewhat increasing our FY21/22e adjusted EBITDA forecasts. Our valuation increases to £706m or 1,445p/share from £683m or 1,400p/share.

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Healthcare

Ergomed

Momentum continues with EBITDA upgrades

H121 trading update

Healthcare services

11 August 2021

Price

1,255p

Market cap

£612m

Net cash (£m) at 30 June 2021

24.6

Shares in issue

48.8m

Free float

77.7%

Code

ERGO

Primary exchange

AIM

Secondary exchange

Frankfurt Xetra

Share price performance

%

1m

3m

12m

Abs

8.2

(2.7)

116.4

Rel (local)

7.1

(3.9)

77.8

52-week high/low

1,430p

585p

Business description

Ergomed is a global full-service contract research outsourcing 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

H121 interim results

September 2021

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’s H121 trading update highlights that operational momentum continues to be strong following its stellar performance in FY20. The order book continues to grow at an impressive rate, up 18% from end-2020 with a strong 1.62x book-to-bill ratio for the period. We maintain our FY21 revenue forecast, in line with company guidance, which assumes no additional FX headwinds, but note that this could mean our FY22 revenue forecast is conservative. With acquisition synergies being realised faster than expected, we adjust our near-term margin assumptions, somewhat increasing our FY21/22e adjusted EBITDA forecasts. Our valuation increases to £706m or 1,445p/share from £683m 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

63.4

N/A

12/20

86.4

19.4

23.7

0.0

53.0

N/A

12/21e

119.6

24.0

34.1

0.0

36.8

N/A

12/22e

136.8

27.1

39.3

0.0

31.9

N/A

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

Burgeoning order book underpins momentum

Total H121 revenues increased by 38.8% to £56.0m (+48.1% CER) with underlying service fees up 28.6% to £47.6m (+37.2% CER). FX headwinds did curtail growth, reflecting the increasing US$ contribution (now c 50% of the mix after the MedSource acquisition in December 2020), which was c 9% lower versus GBP relative to H120. In the AGM statement in June 2021, Ergomed guided that FY21 EBITDA is expected to be ‘materially ahead’ of consensus (£21.9m at the time). We increase our adjusted FY21 EBITDA by 10.6% from £21.7m to £24.0m by adjusting near-term margins. Full H121 results are due in September 2021. The order book stood at £227.8m, up 18.0% from end-2020 and 50.5% y-o-y, providing high visibility of revenue into 2022.

Plenty of firepower for bolt-on acquisitions

Management has repeated on several occasions that it will continue to expand via both organic top-line growth and additional bolt-on acquisitions. The latter is evident from the two acquisitions it completed in 2020 (details in our last outlook report). Looking forward, with net cash of £24.6m on hand (at 30 June 2021) and £30m in unused credit facilities, Ergomed has plenty of firepower to continue pursuing its active M&A strategy, which could bolster the growth outlook.

Valuation: £706m or 1,445p/share

Adjusting our near-term margin assumptions, updating for net cash and rolling our DCF model forward increases our valuation to £706m or 1,445p/share, implying an EV/EBITDA multiple of 28.4x based on our FY21 forecast. Ergomed trades at a premium EV/EBITDA of 24.5x compared to the peer average of 21.9x, but at a discount to Medpace on 28.5x. In our recent outlook note, we provided bull and bear scenarios from flexing our DCF assumptions (long-term sales growth and profit margins). Implementing these near-term adjustments results in a bull case of 2,005p/share and a bear case of 1,032p/share.

Exhibit 1: Financial summary

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

2019

2020

2021e

2022e

INCOME STATEMENT

 

 

 

 

Total revenues

68,255

86,391

119,600

136,813

Cost of sales

(29,790)

(38,686)

(58,600)

(74,808)

Reimbursable expenses

(8,940)

(8,055)

(22,650)

(24,371)

Gross profit

29,525

39,650

54,120

61,403

Gross margin %

43%

46%

45%

45%

SG&A (expenses)

(23,513)

(27,803)

(35,064)

(39,200)

R&D costs

(545)

(152)

(203)

(207)

Other income/(expense)

51

1,839

0

0

Exceptionals and adjustments

3,265

993

976

976

Reported EBITDA

9,230

18,378

23,003

26,147

Depreciation and amortisation

3,712

4,844

4,150

4,150

Reported EBIT

5,518

13,534

18,853

21,997

Finance income/(expense)

(245)

(395)

(245)

(245)

Other income/(expense)

(286)

(511)

0

0

Reported PBT

4,987

12,628

18,608

21,752

Income tax expense (includes exceptionals)

583

(2,936)

(3,536)

(4,133)

Reported net income

5,570

9,692

15,073

17,619

Basic average number of shares, m

46.6

48.5

48.8

48.8

Basic EPS (p)

12.0

20.0

30.9

36.1

Adjusted EBITDA

12,495

19,371

23,979

27,123

Adjusted EBIT

8,783

14,527

19,829

22,973

Adjusted PBT

8,637

14,442

20,184

23,328

Adjusted EPS (p)

19.8

23.7

34.1

39.3

Adjusted diluted EPS (p)

19.8

22.7

32.8

37.8

Order book

124,100

193,000

246,902

274,995

BALANCE SHEET

 

 

 

 

Property, plant and equipment

1,110

1,742

1,742

1,742

Right-of-use assets

5,171

4,715

4,715

4,715

Goodwill

13,380

24,605

24,605

24,605

Intangible assets

2,755

9,618

9,018

8,418

Other non-current assets

2,616

4,310

4,310

4,310

Total non-current assets

25,032

44,990

44,390

43,790

Cash and equivalents

14,259

18,994

29,064

43,018

Trade and other receivables

14,359

22,224

34,405

46,551

Other current assets

3,382

7,009

7,009

7,009

Total current assets

32,000

48,227

70,478

96,578

Lease liabilities

3,716

3,128

3,128

3,128

Long term debt

0

0

0

Other non-current liabilities

635

2,529

2,529

2,529

Total non-current liabilities

4,351

5,657

5,657

5,657

Trade and other payables

10,373

15,702

22,282

30,162

Lease liabilities

1,718

1,978

1,978

1,978

Other current liabilities

3,770

17,388

17,388

17,388

Total current liabilities

15,861

35,068

41,648

49,528

Equity attributable to company

36,820

52,492

67,565

85,184

CASH FLOW STATEMENT

 

 

 

 

Profit before tax

4,987

12,628

18,608

21,752

Cash from operations (CFO)

11,788

18,084

13,621

17,504

Capex

(996)

(974)

(3,550)

(3,550)

Acquisitions & disposals net

(107)

(11,969)

0

0

Other investing activities

(1,728)

0

0

0

Cash used in investing activities (CFIA)

(2,831)

(12,760)

(3,550)

(3,550)

Net proceeds from issue of shares

1,427

(157)

0

0

Movements in debt

(1,677)

(2,189)

0

0

Other financing activities

0

0

0

0

Cash from financing activities (CFF)

(250)

(477)

0

0

Increase/(decrease) in cash and equivalents

8,707

4,847

10,071

13,954

Currency translation differences and other

363

(113)

0

0

Cash and equivalents at start of period

5,189

14,259

18,993

29,064

Cash and equivalents at end of period

14,259

18,993

29,064

43,018

Net (debt)/cash

14,259

18,993

29,064

43,018

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 £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.

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 2021 Edison Investment Research Limited (Edison).

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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.

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Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

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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

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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

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 £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.

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 2021 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.

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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Secure Trust Bank — Good news as flagged

Secure Trust Bank (STB) reported H121 PBT of £30.7m, boosted by a net impairments reversion of £1.1m (vs a net charge of £19.8m in H220). The good news on provisions had been previously flagged by management. Loan arrears have remained lower than expected and most borrowers have returned from payment holidays. Loan demand is picking up and loans grew 1.3% (core division loan growth of 2.6%) in the six months to 30 June 2021. STB also announced a new 25% payout dividend policy along with a surprise 20p interim dividend. This policy better matches the bank’s growth strategy of organic and opportunistic acquisitions. We have raised our FY21 earnings forecasts to reflect lower impairments while trimming FY22 EPS by 11% (ROE forecast 9.5%) to reflect higher costs as the bank expands. Our fair value has edged to 2,234p from 2,163p per share.

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