Ergomed PLC (LON: ERGO) – Expects to beat FY21 adjusted EBITDA forecasts.

Ergomed PLC (LON: ERGO) is an FTSE AIM 100 index listed Company focused on rendering specialised services to the pharmaceutical industry. Moreover, the diversified services encapsulate all clinical development phases, post-approval pharmacovigilance, and medical information. Under the Ergomed brand (CRO), ERGO provides high-quality clinical research & trial management services, and it renders specialist pharmacovigilance (PV) solutions through the PrimeVigilance brand.

In July 2021, the Company expects to release a detailed trading update.

(Source: Company Presentation)

Growth Prospects (as mentioned in the AGM statement released on 10 June 2021)

• Expansion of operations in Japan - ERGO had expanded the footprints of the PrimeVigilance brand in Japan as it had established a new legal entity and regional office. Moreover, the new subsidiary Company, PrimeVigilance Japan KK, became fully operational on 26 April 2021.
• Successful integration of Ashfield Pharmacovigilance - The company operates a pharmacovigilance division under the brand PrimeVigilance. Moreover, this division had delivered strong revenue growth during FY21 so far.
• Further acceleration of CRO business - The CRO business has been progressing well with the acquisition of MedSource, completed in December 2020. It will enhance the existing Ergomed’s customer base and order book.
• Strategic transition to a services-based business model – The LFL service fee revenue had witnessed a robust growth of around 36.1%, and LFL service fee gross margin had demonstrated an increase of about 42.3% during FY20 as compared to the prior year.

Key Risks

• Quality and third-party oversight – Failure to maintain adequate quality, governance and oversight of internal & third-party operations could result in the breach of contract, which might impact the top-line revenue of the Company.
• Cancellation or delay of clinical trials – The unexpected cancellation or delay of a clinical trial by customers might adversely impact the profitability of ERGO.
• Acquisition Risk – The Company may fail to derive desired synergies from the acquisition of Ashfield Pharmacovigilance and MedSource.
• Access to Capital – The inability to raise capital through equity and debt might hamper the growth prospects.
  

Now, we will analyse the Key Fundamental Statistics & Shareholding Pattern of Ergomed PLC.

 Reljanovic (Miroslav) is the most significant shareholder as it holds nearly 10.88 million shares as of 31 March 2021.         

Recent Developments

Board Change – On 17 June 2021, the Company announced that Rolf Soderstrom would step down from ERGO’s board with effect from 30 September 2021.

FY20 Financial Highlights (for the 12 months ended 31 December 2020, as of 23 March 2021)

(Source: Company result)

• The revenue grew by around 26.5% to £86.4 million during FY20. Moreover, the PV revenue surged by about 55.6% during FY20, while CRO revenue remained flat.
• On the profitability front, the gross profit grew by around 34.6%, while the adjusted EBITDA had shown a rise of 55.2% during FY20.
• The Company had managed to show an increase of around 32.9% in cash and cash equivalents to £19.0 million as of 31 December 2020.
• The order book reflects a healthy 55.5% growth in the future contracted revenue to £193.0 million as of 31 December 2020. Moreover, the CRO contract order book had witnessed an exceptional growth from £69.5 million in 2019 to £113.2 million in 2020.
  

Financial Ratios (FY20)

Share Price Performance Analysis

(Analysis done by Kalkine Group)

On 17 June 2021, at 07:15 AM GMT, ERGO’s shares were trading at GBX 1,265.00, down by around 2.69% from the previous day closing price. Stock 52-week High and Low were GBX 1,440.00 and GBX 400.00, respectively.

From a technical perspective, the 21-day EMA of GBX 1,252.04 is sustaining below the ERGO’S stock current price of GBX 1,265.00, supporting the upside potential in the stock price.

Over the last one year, ERGO’s stock price has delivered a positive return of ~207.69%; and it has outperformed the FTSE All-Share Pharmaceuticals & Biotechnology index with a return of around negative 4.66% and the FTSE AIM 100 index with a return of about 33.07%.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

ERGO had managed to carry the positive momentum it had built during 2020 into 2021 as well. The strategic transition to a services-based business model had fared well. The robustness of the global services business was illustrated by strong organic growth in the completion of the two strategic acquisitions across both pharmacovigilance and CRO businesses in the United States. Moreover, the Board expects FY21 adjusted EBITDA to remain ahead of the market expectations. Furthermore, FY21 top-line revenues are expected to meet market expectations. Overall, ERGO would continue to achieve strong sales & robust growth in order book by having effective cost management and driving acquisition synergies.

The next important support level on the technical chart is at GBX 1,053.00.

Considering the impressive order book, recently completed acquisitions, robust revenue growth, bright outlook, robust cash generation, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Ergomed at the current price of GBX 1,265.00 (as on 17 June 2021 at 07:15 AM GMT), with lower-double digit upside potential based on 50.42x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

 

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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