Small Cap Value Report (Tues 28 Sept 2021) - ABDP, ERGO, SUS

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

There's another Mello event tonight, this time a results round up following a busy period in the markets. Companies being covered include Tandem (LON:TND) , Belvoir (LON:BLV) , and many more. David's got more information in this post. If you want, you can join the whole thing for free with the code: 2809MELLO.

Agenda -

Paul's section:

Ab Dynamics (LON:ABDP) - an in-line update from a good company, but the valuation looks way too expensive here.

Jack's section:

Ergomed (LON:ERGO) (I hold) - ongoing positive trading momentum and a busy period for the group, which sees it expand its operations as a result of a strengthened order book. Acquisitions are fully integrated, Ergomed's services are in demand, and the group is targeting growth across multiple geographies. The shares do currently price in a fair amount of that growth, though.

S&u (LON:SUS) (I hold) - revenue down slightly but profit up a lot and the outlook is improving. The group is optimistic regarding long term growth prospects and it looks like full year earnings per share estimates could be beaten. Positive update from a well run company, in my opinion.

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Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

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Paul’s Section

Ab Dynamics (LON:ABDP)

2006p (up 3.4% at 08:04) - mkt cap £454m

Trading Update

AB Dynamics plc (AIM: ABDP), the provider of advanced testing systems, simulation products and testing services to the global automotive and mobility sectors, provides the following trading update and details of the launch of ABD Solutions in advance of the publication of its results for the year ended 31 August 2021 ("FY21").

My summary of today’s update -

H2 performed well.

Managed supply chain & currency effectively.

Strengthening demand.

H2 revenues +20% vs LY organically

H2 total revenues +40% vs LY in total, including acquisition of Vadotech in Mar 2021 (performing in line with expectations)

FY 08/2021 revenues total c.£65m (the StockReport here shows £67.8m, so looks a bit below consensus forecast)

Adjusted operating profit anticipated to be in line with market consensus (doesn’t provide a footnote to explain what this figure is. The broker is Peel Hunt)

Strong cashflow

Net cash £22.3m

Launching a new business unit called ABD Solutions

Diary date - 24 Nov 2021 for FY 08/2021 results.

Outlook - sounds encouraging -

Notwithstanding a challenging backdrop generally, the Group has seen a continued recovery in demand through the second half across all key product and service lines, which demonstrates the resilience of ABD's markets. Despite the significant uplift in sales during the second half, orders exceeded revenues in the period and the business enters FY22 with good momentum.

Valuation - as you can see below, consensus forecast EPS has come down a lot, so meeting this lowered expectation is not impressive.

Stockopedia shows the forecast PER at 39.8 - why on earth would I want to pay that high a rating? I would expect strongly out-performing forecasts for that price.

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My opinion - this has always struck me as a good quality, impressive company. However it looks far too expensive. If the price halved, it would still look fairly pricey, so it’s not of any interest to me. The current price bakes in out-performance, but today’s update is only in line.

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Jack’s section

Ergomed (LON:ERGO)

Share price: 1,320.55p (-2.18%)

Shares in issue: ​​48,890,348

Market cap: £645.6m

(I hold)

Ergomed continues to benefit from both its own successful strategy and a buoyant biopharmaceutical industry backdrop.

The group’s fast-growing services business includes an industry-leading suite of specialist pharmacovigilance solutions (PrimeVigilance, PV) and a full range of high-quality clinical research and trial management services under the Ergomed brand (CRO). These specialist services to the pharmaceutical industry span all phases of clinical development, post-approval pharmacovigilance and medical information.

Revenue growth over time has been highly encouraging.

But the shares now trade at 38.1x forecast earnings and the forecast PEG ratio is 2.2x, suggesting the group needs to positively surprise the market if it wants to break free of its current range in the short term. Although you could argue that it continues to trend upwards in the chart below and the long term prospects are favourable.

It’s an exciting company, one that is now much more fully priced than it was a year or two ago, but still worth keeping tabs on given the raft of developments.

Interim results

Strong organic growth and acquisitions drive increased revenue and profit

Highlights:

• Total revenue growth of 38.8% to £56m,
• Adjusted EBITDA +33% to £12.1m,
• Basic adjusted earnings per share +48.7% to 16.8p,
• Service fee revenue +29.3% (11.1% like for like and 18.2% at constant currencies),
• CRO revenue +90.2% to £27.2m (16.1% LfL and 24.5% cc)
• Net new sales awards up 50.8% and order book up 18% on January 2021 to £193m, up 50.5% year on year,
• North America revenue +70.8% to £35.5m and recent acquisitions Ashfield Pharmacovigilance and MedSource fully integrated,
• Net cash up 74.5% to £24.6m, no debt.

Adjusted EBITDA is operating profit plus depreciation and amortisation, share-based payment charge, and other income and costs. Operating profit was £8.5m (up from £6.9m) compared to adjusted EBITDA of £12.1m, with the bulk of the difference coming from depreciation and amortisation.

Gross margin is down 4.7% to 41.1%. It looks like this is as a result of investment in operations across multiple geographies in response to the strong order book.

While Ergomed has executed a very successful strategic shift in operations, encouragingly, the market backdrop is increasingly supportive. It’s a strong first half with overall growth in revenue driven by increasing demand for its services across the business. This suggests the company could continue to flourish, propelled forwards by favourable tailwinds. Per the group:

Favourable market dynamics have continued and strengthened in the areas in which Ergomed operates, with increased research and development investment generally and particular strength in Ergomed's specialist areas of rare disease and oncology, where the Company's physician- and patient-centric model is also a key competitive advantage. In addition, regulatory scrutiny and harmonisation are also increasing, and the COVID-19 pandemic is accelerating innovation and the adoption of digital technologies. With the Company's growing order book, recognised expertise and brand recognition in our specialist fields, and complementary geographies and service offerings, Ergomed is well placed to take advantage of these favourable market dynamics.

Ergomed's international expansion is continuing at pace. The company's operational presence in the US continues to develop rapidly with strong organic growth alongside the integration of the two new US businesses acquired in 2020.

There is also ongoing expansion into further geographic areas, including the development of operational capabilities in key European countries as well as the new operation in Japan, the fourth largest pharmaceutical market in the world.

PrimeVigilance - revenue up 10.3% to £26.1m (+16.2% constant currency) and gross profit up from £13.4m to £14.6m with gross margins down slightly from 51.3% to 50.7%. The Japan office is now fully operational.

Clinical research services (CRO) - a further acceleration in growth helped by the MedSource acquisition (revenue up 90.2% to £27.2m, and up 16.1% or 24.5% constant currency excluding the acquisition to £16.6m). Gross profit is up 64.7% to £8.4m with gross margins again down slightly, from 45.9% to 44.2% due to foreign exchange headwinds and increased US staffing to support the larger order book.

Ergomed has further strengthened its CRO services with the expansion of operational capabilities in Spain, Bulgaria, Romania and Georgia, organisational improvements including the enhancement of global study start-up capabilities, and the rationalisation of standard operating procedures.

Dr Miroslav Reljanović, Executive Chairman, comments:

Global demand for our services continues to strengthen and our confidence in the long-term growth of the Company is underpinned by the buoyant markets in which we operate, our acquisition strategy, and the robust platform provided by our order book and balance sheet.

Conclusion

It’s been a busy period for the group. Trading was robust through Covid and the group has concluded its strategic transition to a services-based business model. Some sizable acquisitions have also been fully integrated.

Management’s ability to execute, the strong current trading, and the favourable market outlook both in the short and long term all paint a positive picture. The order book is up 18.0% since 1 January 2021 and up 50.5% on prior year to £227.8m, providing high visibility into H2 2021 and beyond.

The sticking point is valuation - while the available opportunity is promising, Ergomed shares are expensive. At these levels holders are pricing in both organic growth and ongoing acquisitions in my opinion.

The group is well placed to achieve this, but from an operational perspective a period of consolidation after so much activity would also be understandable. On balance, it’s probably more likely that the company will continue to grow both organically and acquisitively but for a growth stock, a reduction in the rate of growth and multiple compression is always a risk.

Even after recent upgrades, Edison has a target price of 1,400p for example, which would be just 3.7% upside. Price targets can often be taken with a pinch of salt, but it still comes across as a tacit admission that the shares are up with events (promising though those events are).

In fairness, Edison’s sensitivity analysis presents a range of 1,032p to 2,005p in a bull case, so a lot comes down to ongoing growth rates. At present the order book is encouraging but I still wouldn’t want to pay too much more than current levels as a lot of growth is priced in. I believe this view is reflected in the market performance, which has seen the shares pause for breath for a while now.

That's not necessarily cause for concern - ultimately these are positive results and the long term prospects here remain favourable.

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S&u (LON:SUS)

Share price: 2,857.5p (+0.26%)

Shares in issue: 12,145,260

Market cap: £347.1m

(I hold)

S&U is a family run finance provider with two main divisions. Advantage Finance (by far the largest and most established) is a motor finance company focused on the non-prime used car market. It offers loans of up to £15,000 via brokers, direct to dealers, and through re-finance from customers. These customers typically need a car for work and family purposes. This is an area where ethical risk is high. Importantly, S&U prioritises quality business and longstanding customer relationships.

Aspen Bridging was launched in 2017 and caters to the growing short term refurbishment and residential markets. It lends up to £5m per deal with an average loan of £500,000. S&U management believes this division is well placed to significantly contribute to group profits over the next decade.

It’s a very sensibly run company with prudent, long term management and low staff turnover. Such companies have the foundations in place to plan over much longer time periods, which in itself can be a source of competitive advantage.

Interim results

As the legacy of Covid gradually fades and brightening skies emerge, I am pleased to announce that S&U is robustly back on track and driving forwards towards our usual standard of profitable, sustainable growth.

Highlights:

• Profit before tax up from £6.3m to £19.9m,
• Earnings per share up from 41.9p to 133.1p,
• Net group receivables up 9% to £306.4m,
• Group gearing stable at 61% (31 July 2020: 62%) with £65m of headroom for growth.

The increase in group profits before tax is partly due to a lower than normal impairment charge at Advantage Finance, following better than expected collections.

Advantage Finance PBT more than trebled from £6.1m to £18.5m and new net loan advances are up 35% year on year to £68.3m. This result is accompanied by a 23% increase in loan transactions in the half year at 9,697, loan advances up 35% at £68.3m, and ‘a superb performance in collections and loan quality’.

The number of customers does not appear to have grown and remains around 62,000, but total collections are up by 14%.

The second quarter saw basic live collections at a record £38.3m, and at 94.4% of due, which is the best performance since October 2017. ‘Much credit for this very high quality must go to the understanding relationships our staff develop with our loyal customers’.

S&U has also implemented a number of product changes, particularly aimed at widening Advantage's near prime customer range and in attracting self-employed customers. It is also using its multi-decade customer insights to enhance its digital marketing.

Regarding the market:

Meanwhile the British used car market remains very strong. Latest SMMT figures for August, saw sales transactions increase by 108% year on year and by 6.6% on pre Covid levels. These made the second quarter of 2021/22 a record with 2,167,000 used vehicles changing hands driven by significant growth in the nearly new used car market. Finally, whilst still partially constrained by supply, the new car market is now showing signs of revival. This will increase the supply of used cars and, together with a strong market and a recovering economy, further boost the markets in which Advantage operates. Brighter skies indeed ….

Aspen Bridging PBT has increased from £0.1m to £1.5m and new net loan advances are up from £9.9m to £56.5m, while the receivables book has grown by 69.2% to £57.7m. New loan volumes have increased month on month throughout the half year.

Sixty-six new loan transactions were achieved in the first half, more than double the twenty-five of last year. ‘In doing so, Aspen reached the significant milestone of 300 transactions since its founding just over four years ago’. Much of this rise was due to Aspen's participation in the Government's CBILS scheme, which contributed twenty-two higher-value loan transactions in the first half (the CBILS programme closed on 31 March 2021).

At half year, Aspen's pipeline of future business stood about 15% above budget. Despite the ending of the CBILS scheme and the Government's stamp duty holiday, the latest Nationwide Housing Price Index shows annual price growth now at 11% year on year.

Aspen has boosted its sales team, introduced new products, revised its rate structure and increased the maximum loan size it offers for the highest quality customers.

Conclusion

S&U is a quality operator managed prudently for the long term, with a history of double digit operating margins and earnings per share growth. Shares trade on 13.4x forecast rolling earnings and a PEG of 0.6x.

Today’s EPS result of 133.1p per share suggests the company is well placed to beat existing full year estimates of 187p. I’m surprised the share price hasn’t moved more. Perhaps this is just not a very widely traded stock, or else people might be wondering if these strong profit results are tied to an unsustainable bubble in the second hand car market (and CBILS support in property). It’s true that revenue is down slightly year on year, but profit is up a lot.

I think this company is an attractive mixture of quality, growth, and on a modest valuation managed for the long term and for its shareholders. The outlook is improving and the company has increased its interim dividend from 22p to 33p. There are plenty of growth opportunities going forwards.

In instances like these, I prefer to look at how the company is doing rather than the share price action on the day, and this update seems positive to me.