Ergomed PLC

Ergomed PLC (LON: ERGO) is an FTSE AIM UK 50 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.

The Company expects to release the detailed trading update in July 2021.

Investment Rationale for Valuation – Speculative Buy at GBX 1,150.00

• The top-line revenue and the adjusted EBITDA had shown significant growth during FY20 as compared to FY19. 
• The order book reflects a healthy 55.5% growth in the future contracted revenue to £193.0 million as of 31 December 2020.
• The robustness of the global services business was illustrated by strong organic growth in completing the two strategic acquisitions across both pharmacovigilance and CRO businesses in the United States.

• The Return on Equity of ERGO remained higher than the industry median of 13.5% since FY19, illustrating higher returns to the shareholders as compared to the industry.
• From a technical standpoint, the stock is hovering around the lower Bollinger band, indicating an upside potential in the stock price.

Key Risks

• The inability to raise capital through equity and debt might hamper the growth prospects.
• The acquisition of Ashfield Pharmacovigilance and MedSource might get failed to deliver desired synergies.
• The recent change in management could affect the current working as well as plans of the company.
  

Recent Developments 

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

AGM Statement (as of 10 June 2021)

• The Company operates a pharmacovigilance division under the brand PrimeVigilance. Moreover, this division had delivered strong revenue growth during FY21 so far.
• The CRO business has been progressing well with the acquisition of MedSource, completed in December 2020.
• The Company will update on the outlook with the next trading update scheduled to release in July 2021.

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

(Source: Company result)

• ERGO had shown solid revenue growth of around 26.5% to £86.4 million during FY20.
• 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 cash and cash equivalents stood at £19.0 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.

One Year Share Price Chart

 (Analysis done by Kalkine Group)

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

Conclusion

The strategic transition to a services-based business model had concluded well at the start of 2021. Moreover, the Board expects FY21 adjusted EBITDA to remain ahead of the market expectations. Furthermore, ERGO expects FY21 revenue 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 stock made a 52-week low and high of GBX 435.00 and GBX 1,440.00, respectively.

The next important support level on the technical chart is at GBX 1,070.00.

Based on the strong FY20 results, recently completed acquisitions, and valuation as done using the above method, we have given a “SPECULATIVE BUY” recommendation on Ergomed PLC at the current market price of GBX 1,150.00 (as of 02 July 2021 at 11:32 AM GMT), with lower-double digit upside potential based on 43.88x Price/NTM Earnings per share (approx.) on FY21E earnings per share (approx.).

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

*All forecasted figures and Peers/ Industry 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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