Small Cap Value Report (Tue 23 March 2021) - LOOP, COG, PMP, TMO, LUCE, WYN, BOOT, ERGO

Good morning, it’s Paul & Jack here with the SCVR for Tuesday.

Timing - it's an all day job, with a deluge of results/trading updates out today. Update at 15:57 - today's report is now finished.

Agenda -

Paul -

Loopup (LON:LOOP) (I hold) - delayed accounts & NOMAD appointed

Cambridge Cognition Holdings (LON:COG) (I hold) - results in line with Jan 2021 trading update. Almost reached breakeven, strong order book, looks very good to me, and still cheap.

Portmeirion (LON:PMP) (I hold) - brief update from webinar last weeks, some interesting points I jotted down.

Time Out (LON:TMO) - Pulls out of a London development site, and confirms it is reviewing another fundraising proposal. Looks an awful investment to me, very high risk.

Luceco (LON:LUCE) - impressive results for FY 12/2020, in line with January's trading update. Still looks reasonably priced.

Jack -

Wynnstay (LON:WYN) - 'in line' trading update, 3.2% dividend confirmed, and two bolt-on acquisitions

Henry Boot (LON:BOOT) - improving outlook for this prudently run construction company

Ergomed (LON:ERGO) - great results from this high flying pharmaceutical services provider, but the shares might be too expensive for some.

.

---

Paul's Section

Loopup (LON:LOOP)

(I hold)

78p (pre market open) - mkt cap £43m

Delayed accounts

FY 12/2020 results are delayed. A very specific reason has been given - that a “routine technical review” has not been completed in time by the auditor, Grant Thornton. This relates to the amortisation treatment of intangible assets from an acquisition.

I’m surprised at the reason given. I would have thought it was very simple to decide whether goodwill has to be amortised or not. You just look at how much profit is being made by the subsidiary in question, and if that supports the goodwill on the balance sheet or not. If not, then you write it down. Why that would cause a delay to the accounts, I’m not sure. Is there some other reason, I wonder? (e.g. auditors not being happy with going concern?)

This bit is positive though - the RNS specifically re-confirms the 2020 results given in a previous trading update -

For the avoidance of doubt, this is a non-cash, technical accounting review and the Group reconfirms in line FY2020 results: revenue of £50.2 million (FY2019: £42.5 million); EBITDA of £15.3 million (FY2019: £6.4 million); year-end gross cash of £12.1 million (FY2019: £3.0 million); and net debt of £0.7 million (FY2019: £11.5 million).

That is reassuring. I don’t mind writedowns of intangibles, because I write them off completely when I analyse all accounts anyway.

My opinion - on balance, this update probably shouldn’t be price sensitive, if we take it at face value. It must be very difficult to audit company accounts during lockdown, as you would have to rely on the company emailing you everything. That’s the not the same as being on site, and rummaging around through filing cabinets, and observing the body language of staff you interview. It struck me as odd that training for auditors (when I did it in the early 1990s) didn’t include anything on reading body language, or how to phrase questions. Maybe they do that these days, as it was a yawning gap in the skill set of people who were supposed to be investigating the accounts. There’s a very good book on this, called Spy the Lie - written by former CIA operatives, if you’re interested in how to tell if people are lying, and how to tease the truth out of them with carefully structured questions - useful for our company meetings!

NOMAD - a separate announcement today, saying that Panmure Gordon will service as its NOMAD and sole corporate broker with immediate effect. It’s not clear if this is linked to the delay in the accounts or not.

LOOP shares are almost unique in having had no bounce at all in the last 6 months. Either there’s an opportunity, or things are going really badly. It had a really good H1, when lockdown 1 started, but then seemed to hit a brick wall in H2. Maybe customers switched to using Microsoft Teams instead? We’ll find out in due course.

I've got little confidence in the company or its management, due to erratic decisions & performance in the past, so have resisted the urge to average down on my existing (thankfully smallish) holding. I'm too stubborn to sell.

.

.

---

Cambridge Cognition Holdings (LON:COG)

(I hold)

78.5p (up 5% at 10:00) - mkt cap £24m

Preliminary Results

Cambridge Cognition Holdings plc, which develops and markets digital technology to deliver customer-focused solutions to assess brain health, announces its unaudited preliminary results for the year ended 31 December 2020.

I’ve followed this company since it floated in 2013. The product sounded very interesting, and I attended a demo in the City a few years ago, lured by free beer and canapes. The key point is that, whilst its product looks simple (cognitive tests on an iPad, to detect & measure things like dementia, or the mental impact when taking a drug trial), there’s decades of data and experience backing it up - hence a proper moat, and high gross margin.

Despite this, revenues never seemed to gain traction, seemingly stuck between £5-7m p.a., and it seemed to generate losses, and burn cash nearly every year, as you can see -

.

Positive trading update - I reported here on 19 Jan 2021 that the FY 12/2020 update looked good, with a 34% rise in revenue to £6.74m, and the £(2.9)m loss in 2019 having been largely eliminated, with only £(0.44)m loss for 2020.

Key factors were: 2 large one-off orders of £3.1m in 2020, and a reduction in overheads.

Probably of more importance though, was the very strong order book, which almost doubled to £11.17m as at 31 Dec 2020, of which “at least” £6.0m expected to be recognised as revenue in 2021 - meaning that nearly all of forecast 2021 revenues are already contracted, and making further growth look very likely. It’s a very high gross margin business too, therefore it only needs a small increase in 2021 revenues, to move into profits at long last. Hence why I concluded in Jan 2021 that this share is starting to look interesting.

.

Investor presentation - is today at 18:00 - open to all - details here.

.

Preliminary Results - this is out today.

Key points -

Revenue up 34% to £6.74m - as expected

Record sales intake of £12.7m (up 159% on a year earlier - highly significant)

Almost at breakeven, loss after tax credit, of £(438)k greatly reduced from £(2.9)m loss in 2019 - again as expected, in line with the Jan 2021 update mentioned above.

Operational gearing - looks exciting, with a gross margin of 80% - meaning that the record sales intake is mainly gross profit - that’s what I look for, when searching for growth companies - a highly profitable niche, combined with strong order book growth, can have a transformative boost to profitability, if it can be sustained.

Balance sheet - not great, it only has £57k in NAV, but that’s probably adequate. However it looks as if COG has a favourable working capital cycle, probably receiving customer stage payments up-front I imagine, because it’s sitting on net cash of £3.05m - probably adequate, especially as it should be profitable from now on. Hence I’d say the risk of another placing looks low, and would probably only be small anyway, so low risk of further dilution.

Accounting looks conservative - it seems that development costs are written off as incurred, rather than being capitalised, which is good.

Retained earnings, in reserves, is negative £(17.4)m - suggesting that COG should have plenty of tax losses to offset against future profits.

Cashflow statement - very simple figures. Note 5 shows that the positive operating cashflow of £1.0m all came from favourable working capital movements (creditors rising more than debtors). There was £1.4m from a placing. Those were the main causes of the cash pile rising from £901k to £3047k in the year.

Overall, I can’t see any funnies in the numbers, these look simple & clean accounts.

Outlook - all important in turnaround situations.

Subjectively, the commentary today sounds more upbeat than last time, some examples;

We expect the business to continue to grow strongly through 2021 and beyond…

We have a strong pipeline of opportunities that we aim to convert into orders and revenues in 2021 to add to the £6.0m of contracted order backlog we expect to realise this year…

We were pleased to be profitable in the last quarter of 2020 and would expect that to continue into 2021. We are anticipating further revenue growth and plan to continue careful financial management and targeted investment in research and development…..

With a strategy focused on commercial execution, substantial value anticipated from newer eCOA and Digital Health solutions in attractive, high growth markets, together with the established CANTAB™ product and the commercial launch of NeuroVocalix™ planned for 2021, we believe that we are well placed to continue to build substantial, sustainable shareholder value. We look forward to reporting further exciting progress in 2021….

My opinion - this looks really good.

Although the share price has risen a lot in the last year, the market cap is only £24m. For a niche growth company that’s just moved into quarterly profitability, and has a bulging order book, that valuation still looks modest to me, especially in a bull market like this. £50-100m looks more realistic to me.

As a serial disappointer in the past, I wonder if it might take the market time to recognise that a sustainable turnaround appears to be happening here?

My broker told me last week that there’s a seller in the market, so that could be an opportunity to pick up some more stock before a potentially big re-rating occurs? I think all the signs are looking good here.

The only negative I can think of, is that revenues don't seem to be recurring, so there's always a risk that the order book could dry up again. But with 2 years' revenues already in the bag, contracted, that risk doesn't seem imminent. Also, as you can see from the chart below, since it listed there have been some false dawns before. Which might make people hesitant in trusting the strong recovery underway now, perhaps?

.

.

---

Portmeirion (LON:PMP)

(I hold)

Just a few quick points from the recent InvestorMeetCompany webinar from last week. The recording is now available here.

Key points that I jotted down are worth noting, as subjectively it felt more upbeat than the RNS itself, or maybe I didn’t read the RNS carefully enough - I have so many companies to cover, that I rarely have enough time to read all the commentary -

• Big new range of Sophie Conran designed products to be launched, which is a popular, strong selling part of the business
• Outlook - “real momentum going into the next couple of years”
• Reducing factory costs by 10% - e.g. automation projects £1.5m capex, payback 2-3 years
• Increasing factory capacity also
• Procurement cost savings of c.£1m by end 2022 in the pipeline
• Factories currently running at close to full capacity - sounds encouraging

After watching the webinar, I feel there are more reasons to be cheerful about holding this share, than when I wrote a section about it earlier.

It’s not a shoot the lights out type of share, but a decent recovery in earnings from poor 2020 figures, looks underway. Also, I’ve always been convinced there’s hidden value in its many brands, and their heritage. Similar to Sanderson Design (LON:SDG) (I hold). These brands could appeal to a takeover bidder, and be broadened into more lifestyle brands with much broader product categories, and sold internationally. Hence I like both PMP and SDG for the long-term potential. Although as with most things, the prices have risen a lot in the last 6 months, so you do wonder at what price the market is up with events?

.

.

---

Time Out (LON:TMO)

37p (down 20% at 11:50) - mkt cap £106m

Time Out Market London (Waterloo) & funding update

This caught my eye on the top risers & fallers list. The update which came out at 10:05 seems to have triggered a sharp fall in price.

Time Out has pulled out of a development project at Waterloo, due to the impact of covid (and presumably not having the money to proceed with it either?).

Fundraising -

This decision does not change the Company's need to secure additional funding, as a result of the financial impact of repeated periods of pandemic-related containment as previously stated in its interim results on 30 September 2020.

Consequently, the Company is currently reviewing an equity funding proposal that would ensure the Group has financial and operational flexibility. It is anticipated that an update will be provided at the time of the Company's interim results announcement on or around 30 March.

Looking back through the previous RNSs, this company raised c.£47m in a 35p placing & small open offer, in June 2020.

I’ve checked back, and the interim results (6m to 30 June 2020) published on 30 Sept 2020 did indeed mention that more funding might be needed. Remember that this company was heavily loss-making & cash burning before covid, so it started off in a ropey position, before covid lockdowns clobbered its whole sector. Very unfortunate, and not the company's fault of course, it's operating in probably the worst sector for covid impact - a magazine for leisure/events, and food markets.

Last time it needed more cash, TMO benefited from having major shareholders who seemed happy to back the company, at a not unreasonable price discount of c.15% with fresh funding at 35p.

.

.

This is a wider point worth noting - I’ve seen in several other cases, having supportive, dominant major shareholders, seems to have generally worked out very well for companies needing cash injections over the last year. Whereas companies with a fragmented shareholder base can maybe find it more difficult to raise money at a sensible price. New investors aren't bothered about diluting the existing holders, indeed are incentivised to demand a deep discount on pricing of a placing.

Each situation is unique I suppose, but my general feeling is that it’s probably best to have a cornerstone, deep-pocketed investor, or several, who are prepared to stand their corner in a crisis & put in more funding, which is what happened before at TMO.

My opinion - I’ve never understood that appeal of this share.

Look at this historic performance - it’s terrible! Obviously the light blue forecast blobs are pie-in-the-sky now, so should be ignored.

.

That said, clever and shrewd people, are big shareholders here, so they must see something good in the future potential.

Smaller shareholders are now completely at the mercy of the major shareholders, and if, and on what terms, they are prepared to keep pouring money in, to keep TMO afloat. For this reason, I think this share needs to be seen as currently very high risk.

Major shareholders are stuck in it. Whereas little people like us, can go in & out at will. Therefore, I cannot see why anyone would want to buy or hold a potentially insolvent company, and hope that the major shareholders will put in more money at a favourable price? It seems a lot of risk, for not much upside.

.

---

Luceco (LON:LUCE)

265p (up 5%, at 14:38) - mkt cap £426m

Luceco plc ("Luceco", or the "Group" or the "Company"), a manufacturer and distributor of high quality and innovative wiring accessories, LED lighting , and portable power products, today announces its audited results for the year ended 31 December 2020 ("FY 2020" or "the period").

I covered Luceco’s FY 12/2020 trading update here on 22 Jan 2021. It had a highly successful year, with a series of positive updates.

2020 Full Year Results -

These numbers look bang in line with the update in Jan 2021.

Revenue of £176.2m, up 2.4% on 2019

Adj EPS of 15.5p (up 101% on 2019) is slightly higher than 15.0p forecast from Liberum.

Adj operating profit is up from £18.0m in 2019, to £30.0m in 2020, yet revenues only rose 2.4%, how come? The answer is margin improvement (profit up £8m), and cost cutting (profit up £4m). That’s great, but companies generally cannot keep raising margins and lowering costs forever. So I see this large increase in profits as a bit of a one-off in 2020. Future profit growth is likely to be more modest in % terms. Ultimately top line (revenues) growth is needed to drive continued profit growth.

Valuation - at 265p per share, and 15.5p adj EPS, the 2020 PER is 17.1 - which looks reasonable.

Balance sheet - the number that jumps out at me is £71.8m in receivables, up 65% on a year ago. That doesn’t look right, it’s too high relative to annual revenues of £176.2m, and why would receivables have risen 65%, when revenues are only up 2.4%?

There’s a similar large increase in trade payables. Why do customers take so long to pay?

I’ve found an explanation in the commentary, it says -

The Group once again converted all its Adjusted Operating Profit into Adjusted Operating Cash Flow. Rapid sales growth and associated industry-wide supply chain constraints in the fourth quarter resulted in a temporary increase in working capital towards the end of the year. Widely reported port delays in China and in the UK due to Brexit meant some finished goods were not delivered until early 2021 and there were delays in the issuance of port documents required to collect payments from customers. This temporarily increased year-end inventory days to 107 days (2019: 105 days) and receivable days to 105 (2019: 89 days). Port delays are now reducing, and I expect working capital levels to normalise in 2021. Trade payable days also increased, due to the increased activity in Q4, from 75 days to 95 days.

Outlook comments - sound positive -

"We have started 2021 with strong momentum despite tighter social distancing measures in some markets. Revenue growth has accelerated from the high levels achieved at the end of last year as new business wins, increased home improvement spending, superior access to high growth channels and product availability combine to sustain further market share gains.

"We have seen inflation in raw material and freight costs in 2021 as economies recover from COVID-19. These can be expected to create some temporary gross margin pressures for all manufacturers until they are passed through the value chain or otherwise subside. However, we expect our strong sales momentum and tight control of overheads to mitigate the impact of inflation on operating margins, which should be similar to those achieved in 2020. We therefore remain confident of further revenue and profit progression in 2021."

Investor presentation is on 29 March at 11:00 - details here.

Dividends - are becoming more generous -

As previously announced, the Board has therefore approved a new dividend policy with the payout ratio increased from 20-30% to 40-60% of Adjusted Profit After Tax. It is recommending a final dividend of 4.7p per share, which with the interim dividend of 1.5p, is consistent with a 40% payout

My opinion - Luceco continues to look good. A company that has performed remarkably well in 2020, and sounds upbeat about the future as well, at a reasonable price.

The commentary explains the working capital increase, so hopefully that would unwind in H1 of 2021 - I’ve just submitted the question: has working capital now normalised? for the forthcoming webinar on InvestorMeetCompany.

Overall, it looks a good company, at a still-reasonable price, despite the big rise in share price. The rise looks justified.

---

Jack's section

Wynnstay (LON:WYN)

Share price: 467.5p (pre-open)

Shares in issue: 20,051,043

Market cap: £93.7m

(I hold)

Wynnstay (LON:WYN) is an often neglected agricultural business that splits its operations into two divisions: Agriculture (covering the manufacture and supply of agricultural inputs to farmers), and Specialist Agricultural Merchanting (which supplies specialist agricultural and retail products to customers).

The share price spiked up to 532p earlier in March - a clear break out to a 52-week high - so sentiment does appear to be improving. With shares now back down to 467.5p, a forecast PE ratio of 13.6x, and a forecast dividend yield of 3.3%, I would argue the shares still offer value but that the shorter term rerate opportunity has reduced.

That said, and while the company is unlikely to generate tech or healthcare levels of growth, its dividend track record is terrific, its business model is resilient (but cyclical), and its medium to longer term growth opportunities are understated in my view.

AGM statement

The key takeaway is that trading in the first four months of the financial year ending 31 October 2021 has been in line with management expectations.

Farmer sentiment has continued to improve, buoyed by higher farmgate prices and greater clarity over the future direction of UK farming, following the Trade Agreement with the European Union and the passage into law of the Agriculture Bill.

Feed sales and sales in the Specialist Agricultural Merchanting division in the period were ahead of last year but Arable sales were down due to lower winter cereal seed volumes.

Wynnstay has expanded its presence in the east of the UK with the two bolt-on acquisitions (previously reported) and the group remains an essential service provider with full operations.

A final dividend of 10p will be paid on the 30th April, so the total dividend will be 14.60p. That’s a yield of 3.2% and is a 4.3% year-on-year increase.

Chairman Jim McCarthy is stepping down as chairman after eight years and will remain on the board as a Non-executive Director until 31 July 2021. He will be succeeded by Steve Ellwood. It looks like a predictably steady and sensible transition.

Conclusion

The last two months of the first half are important trading months in the seasonal calendar, so an ‘in-line’ update for the first four months is encouraging, particularly when coupled with the improving farmer sentiment.

Even though Wynnstay’s shares are not as cheap as they have been over the past year, this remains a sensibly run operation with a long term outlook and steady, if unexciting, growth potential. And its StockRank remains very strong, with a Value Rank of 92 particularly impressive given the recent rerate.

It’s fair to say that when the shares were at between 300p and 350p, as they were for most of last year, there was a more obvious shorter term rerate opportunity.

But, while trading can be volatile here, I continue to think there is a longer term investment case to be made for stable, income-producing, cash-generative growth as Wynnstay consolidates via bolt-on acquisitions in a fragmented UK agriculture industry.

Henry Boot (LON:BOOT)

Share price: 285.9p (+0.66%)

Shares in issue: 133,208,931

Market cap: £380.8m

Henry Boot (LON:BOOT) has been successfully operating in land, property and development for over 130 years and comprises three segments. Running through these quickly, we have:

Land promotion

• Hallam Land Management - strategic land and planning promotion, well into its third decade of acquiring, promoting, developing and trading in land,

Construction

• Henry Boot Construction - construction contractor to public and private clients,
• Road Link (A69) - which has a 30 year contract to operate and maintain the A69 trunk road between Carlisle and Newcastle.

Development

• Henry Boot Development - dealing with more ambitious developments,
• Stonebridge Homes - builds and sells family homes in Yorkshire,

The group also has Banner Plant, which offers a range of products and services for sale and hire.

It strikes me as a sensibly run operation that considers its shareholder base. In fact we can see the Major Shareholders list is dominated by Boot and Reiss family members and trusts. But the share price performance has been fairly pedestrian over the past five years - is that a lack of progress, or a sign of undervaluation?

Final Results for the year to 31 December

A little further down these results is perhaps the key sentence for a construction company given that the past year has inevitably been impacted by Covid-19:

Good start to year, ahead of expectations on activity, order book and forward sales in land, development and housebuilding

Full year highlights include:

• Revenue -41% to £222.4m,
• Profit before tax -65% to £17.1m, ‘ahead of expectations’ due to land disposals and a resilient second half,
• Earnings per share -68% to 9p,
• Net asset value per share of 235p (2019: 239p),
• Net cash position steady at £27m,
• Final dividend of 3.3p and total dividend of 5.5p, up 10%.

That puts the group’s shares on an FY20 PE ratio of 31.6x with an FY20 dividend yield of 1.9%. It’s an historically conservative and well-covered dividend though and, if we expect business to fully recover, then assuming a return to FY19’s 27.6p of earnings would see a much more appealing earnings multiple of 10.5x.

The group’s resilient net asset value per share of 235p should provide further reassurance.

Boot also touts an evolved strategy focusing on three long-term markets: industrial & logistics, residential, and urban development, ‘all of which are driven by positive long-term trends’.

The land promotion business sold 2,000 plots and its interest in a major JV in the Midlands. This capital was then recycled into growing the landbank to 16,607 acres (2019:14,898 acres). There’s a £1.4bn development pipeline (HB share - £1.1bn) with 78% in industrial and logistics.

Stonebridge Homes performed ahead of target after completing on 115 sales in 2020 and secured 57% of their sales target for 2021. The land bank increased to 1,119 plots including a site in Wakefield secured for 149 plots.

Boot’s construction business recovered well in H2, performing ahead of expectations with a turnover of £86.2m. Encouraging demand, led by public sector customers, has created a full order book for 2021.

All in all, it sounds fairly encouraging.

Conclusion

The good thing about Henry Boot is that it looks to be prudently run and, reading through the detail, it’s clear that the group has managed its way through Covid with minimal lasting impacts for shareholders.

Boot initially utilised the Government's CJRS but only ever had a minority of people on furlough, with the business topping their pay up to 100%. It stopped using the CJRS in August 2020 and paid back all furlough grants claimed under the scheme in February 2021 as confidence levels stabilised.

The group has a strong balance sheet as well, with net cash of £38.5m as at 28 February 2021, committed debt facilities of £75m, and material retained earnings, so it’s in a good position going forward.

And now the group observes encouraging signs of recovery, which has translated into a good start to the new year. Meanwhile, Boot’s three key markets of Industrial & Logistics, residential, and urban development, all benefit from structural tail winds.

The group believes this strategy can generate an average ROCE between 10-15% p.a., without high levels of financial gearing, and so fully intends to grow profits to beyond pre pandemic levels.

Perhaps Boot is not a clear bargain in the same way so many companies have been over the past twelve months, but I would argue the valuation is undemanding given that it is a quality operator with a shareholder-friendly culture that is well placed to capitalise on an encouraging outlook. It’s probably suited to longer-term investors.

Ergomed (LON:ERGO)

Share price: 1,237p (+3.08%)

Shares in issue: 48,746,109

Market cap: £603m

(I hold)

Ergomed (LON:ERGO) provides specialist services to the pharmaceutical industry across all phases of clinical development, post-approval pharmacovigilance and medical information.

Its fast-growing services business includes an industry-leading suite of pharmacovigilance (PV) solutions under the PrimeVigilance brand, as well as high-quality clinical research and trial management services under the Ergomed brand (CRO).

This is an impressive healthcare growth stock with some excellent CAGRs, so well worth revisiting in my view.

As an aside, it is one of the Stockopedia Investment Club’s best performers. You can see Ben’s original write up here.

Full year results

Highlights:

• Revenue +26.5% to £86.4m,
• Gross profit +34.6% to £39.7m and gross margin up 2.6ppts to 45.9%,
• Adjusted EBITDA +55.2% to £19.4m,
• Net cash +32.9% to £19m,
• Order book +55.5% to £193m,
• Basic adjusted EPS +29.6% to 25.8p. Basic statutory EPS +67% to 20p.

It’s an excellent set of results on the face of it and, predictably, the main sticking point is valuation.

Based on these results, Ergomed shares trade at 48.5x FY20 earnings per share. FY21 is forecast to see earnings per share rise to 30.5p for a forecast PE ratio of 40.1x - so yes there’s exciting growth here, but the shares are quite expensive. Stockopedia shows the forecast PEG to be 2.4, which is high.

That said, Ergomed operates in large and growing markets so there is plenty of room for future growth. The gross margin expansion bodes well, too.

There are a fair amount of adjustments in the accounts, detailed in note 8 but none of them jump out as particularly aggressive.

Goodwill and intangibles have grown significantly, up from £13.38m to £24.65m and £2.76m to £9.62m respectively, but the group does have nearly £47m of current assets and no debt on the balance sheet. So it’s asset-light but not risky, with net tangible assets of c£18.6m.

The growth in revenue and profitability led to strong operating cash generation and cash conversion of 99% to adjusted EBITDA. Cash and cash equivalents grew by £4.7m to £19.0m at the year-end even after net cash outflows on the acquisitions of Ashfield Pharmacovigilance in January 2020 of £7.6m and MedSource in December of £4.4m.

Net cash from operations is up 53% and, with less than £1m of capex, free cash flows look robust.

Furthermore, consolidated retained earnings now stand at £45.4m (up by £50.9m) following a capital reduction and the generation of distributable reserves.

PrimeVigilance

Looking at the 26.5% revenue increase in more detail, it looks like pharmacovigilance has delivered the growth. The division is up 55.6% to £55.1m after the Ashfield Pharmacovigilance acquisition, and up 30% on a like-for-like basis.

There is an increasing global requirement for pharmacovigilance services and an ongoing drive to improve drug safety through regulation. These are good tailwinds for Ergomed’s pharmacovigilance business and its position as an outsourced specialist.

In Europe, the implementation of Good Pharmacovigilance Practice ('GPvP') in 2012 and subsequent mandatory compliance has led to an increased demand for outsourced PV services and been a consistent driver for Ergomed's growth.

In the US, the existing stringent PV regulatory regime continues to be regularly strengthened on an ongoing basis.

Similarly, PV regulation continues to be rolled out in the Middle East, China and South East Asia, providing further growth opportunities for Ergomed's PV business. It can leverage existing partnerships here to facilitate growth.

Interestingly, the group says that Brexit will add regulatory complexity and ‘drive further demand for specialist outsourced PV services’.

This division has acquired and integrated Ashfield Pharmacovigilance

This is an established PV provider in North America, that has been rebranded as PrimeVigilance USA Inc. ('PV USA') and significantly expands Ergomed's PV offering in North America.

Ergomed CRO

Revenue in Clinical Research Services (CRO) was flat at £31.3m despite COVID-19, with service fee revenue returning to growth in H2 (up 13.5% over H1).

The CRO market has experienced significant expansion with high annual growth in oncology and rare disease research expected to continue over the coming years. More general tailwinds include increased investment in drug development by pharma-biotech companies, a shift towards clinical trial outsourcing, and strong growth in the number of trials in markets such as Asia.

There has been an acquisition here, too: MedSource. This is a US-based CRO business with over 20 years' experience in delivering specialist oncology and rare disease clinical trial services.

It further strengthens Ergomed's position as a high-quality oncology and rare disease CRO provider in the strategically important North American market.

Conclusion

Ergomed continues to make great progress despite the COVID-19 pandemic. In fact, the pandemic is spurring innovation and investment in infrastructure, technology and digital transformation.

It’s been a great year for the company, with two key strategic acquisitions in the US. The group looks well positioned for further organic and acquisitive growth as it seeks its goal of achieving ‘global leadership in specialised pharmaceutical services addressing unmet medical needs and patient safety’.

Ergomed says it has finished its transition to a fully services-based business model, which was originally announced in 2018, freeing it up to focus on the services-based model in both PV and CRO and allowing it to reduce R&D expenditure from £0.5m in 2019 to £0.2m in 2020.

Yes, the shares are expensive based on earnings and cash flow multiples, but this might be one of those instances where you pay up for a high quality, rapidly expanding company and just let it compound over time. The order book to start 2021 looks particularly strong.

Ergomed has so far achieved a compound annual revenue growth rate of over 20% since the IPO in 2014 and there are no signs of this slowing.