Ergomed PLC (LON:ERGO) has lowered its revenue forecasts for the first half of 2018 due to delays in the start-up of some contracts, leading broker Numis to downgrade the firm to ‘hold’ from ‘buy’.
The AIM-listed pharmaceuticals developer said the contract delays, in addition to reductions in scope by sponsors of others, meant that its first-half revenue was expected to be “below management’s expectations”, with full-year revenue expected to be around 5% less than the market consensus.
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The group added that from a profitability perspective, its adjusted earnings (EBITDA) were forecast to be only modestly ahead of 2017’s figure of £2.8mln.
However, the company’s backlog, which included two contracts on the point of signature, totalled just over £100mln compared to £88mln at the start of 2018, with a strong cash position and positive cash flows in the period.
Stephen Stamp, Ergomed chief executive, said: "This year, we anticipated exceeding market expectations for revenue, allowing us to more than cover the cost of the additional investment required to deliver our strategic goals for 2020. It is unfortunate that delays and reductions in scope of a limited number of contracts has resulted in us investing ahead of the curve. The business overall is in robust health, as demonstrated by a backlog approaching £100 million, and we are confident 2018 will provide a solid foundation for future growth."
In a note to clients, analysts at Numis said that as Ergomed “is constantly hiring ahead of anticipated revenue growth”, a delay in anticipated revenue was going to drive margins lower as utilisation dropped.
They added: “We downgrade our revenues by c.5% to £46.5mln primarily hitting the CRO division (£19.0mln from £21.6mln), with top line growth in PV [PrimeVigilance division] slightly higher, but on a higher cost base (reduced gross margins in both divisions) which effectively delays our EBITDA ramp by one year.”
The broker was, however, fairly ambivalent regarding the delay: “Contract delays are a frequent occurrence in the CRO business, while in the PV division trading seems to have been in line with or slightly ahead of our expectations, while management planned for more.”