IDEAS: Focused on its orthopedic products for the aging population,
Ergoresearch Ltd.’s (TSXV: ERG) efficiency gains in production are showing up
in profits, with new healthcare products and services ready to launch.
Ltd. (TSXV: ERG – C$0.23) had a turnaround year in fiscal 2016. The Company
reported a small profit of about C$112 thousand compared to losing over C$7
million the year prior. Management’s focus on improving gross margins and
reducing costs for its orthopedic products has set the foundation for
profitable growth as a mass producer of custom-fit orthotics.
Ltd. is based in Quebec, Canada and operates in the
healthcare sector, in specific the orthopedic market, which is in full
expansion owing to aging populations. It develops innovative orthopedic
solutions and products often paid for by third-party health insurance coverage
(both private and government) on behalf of the patient.
has built up Quebec’s
largest network, comprising of 70 orthotic clinics best known as "Equilibre” and is the leading manufacturer of
"intelligent" foot orthotics and specialty orthotics. The Company is
a trendsetter in creating durable medical equipment and software for the
orthopedics market and holds may patents in this field.
designed and commercialized"Webfit” technology, the first
robotized custom-fit orthotics manufacturing software program. WebFit is
a mobile Internet tool which enables the Company to offer services at what are
known as "satellite” medical clinics to meet patients in person, at the clinic
of their choice. According to the Company, WebFit is a unique concept in the
field of foot orthopedics in that it offers orthotics clinics and laboratories,
an innovative solution align with better patient pain management.
Company’s WebFit technology recreates the architecture of the foot with the
unique custom fit design of its orthotics based on each patient’s anthropometric
measurements and pressure distribution data using a scanning technology. This
process, which is patented by the Company, offers greater amplitude of range
and pain management for optimal clinical performance.
the data from the patient assessment has been collected it is transmitted to
Ergoresearch’s computational servers to create the optimal orthotic device
using computer-aided design (CAD) software. The Company’s manufacturing process
relies on computer-aided manufacturing (CAM)
software and numerical control machine tools (NCMT), and offers the ability of
mass producing custom-fit orthotics while ensuring reproducibility and
was about two years ago when Ergoresearch’s Management determined that their Company
was at a crossroads. The Company built up a good orthotics business but the
overall financial performance was weak due to production inefficiencies and
continued losses from its homecare division. At that time the Company had lot
of debt, too.
try to turnaround around the financial performance, Ergoresearch decided to
renew its focus in servicing the orthotics market, which had good revenue
growth but, with the appropriate management attention and resources, could grow
profitably. To achieve this, the Company’s Management divested non-core
businesses, paid off all of its long-term debt and invested heavily in an
Enterprise Resource Planning (ERP) system to integrate
areas such as planning, purchasing, inventory, sales, marketing, finance and
human resources in an effort to lower costs and build stronger operating
margins for its orthotics business.
is the culmination of Management’s efforts to turn around the financial
performance of Ergoresearch that has attracted our attention. To begin fiscal
2017, the first quarter ended September 30th, 2016, the Company reported EBITDA
of C$429 thousand (13% of sales), net income of C$204 thousand with
earnings-per-share (EPS) of C$0.003. Cash flow from
operating activities amounted to C$427,897 for the first quarter of fiscal year
2017. Revenues were down marginally in Q1 to C$3.4 million, mostly a
result of the discontinued sales from its homecare products. Today, revenues
from orthopedic prescriptions represent a significant percentage of the
Company’s business, generated through the sale of Ergoresearch’s custom-fit
foot orthotics. Historically the Company’s revenues are lower during the winter
Company’s balance sheet at the end of Q1 for fiscal 2017 was in pristine shape.
Ergoresearch is cash rich: C$8.1 million cash on hand (or in short term investments)
and only a nominal amount of total debt.
Investorfile blog see tremendous value in the shares of Ergoresearch and we
have initiated coverage on the Company as one of Investorfile’s Top Ideas as a
small cap value stock. The reasons we feel that Ergoresearch’s stock is worthy
of this distinction are plentiful.
reasons include: At its last closing price of C$0.23, the Company’s stock
trades at a 25% discount to its book value per share; The Company has a positive
working capital balance of C$11.2 million, which equates to about C$0.15 per
share; on an operational basis the stock currently trades at a multiple that is
less than five times the Company’s underlying Enterprise Value (EV) to EBITDA
ratio (if annualizing Q1 results). Based on the above valuation metrics we feel
the current stock price of Ergoresearch is a bargain for a small cap growth
the Investorfile blog sees value in stock price today, but just as intriguing
are the potential growth prospects for the Company’s financial performance.
From Management’s comments in Q1, sales trends are positive again. As sales
rise we expect EBITDA as a percentage of sales to continue to strengthen which
will improve profitability. Also, Ergoresearch is flush with cash and we feel
at some point this cash will be deployed for an acquisition to grow the Company.
also see opportunity for future revenue growth from new products and services.
In the first half of fiscal 2018, Ergoresearch is expected to re-launch a new generation of a world-patented orthotic devices
called "OdrA” which revolutionizes the treatment of pain associated with knee
osteoarthritis. The product had been recently redesigned for the mass market at
a lower price point. The Company has the exclusive rights to the OdrA product
recently announced that they will leverage the use its Quebec network of clinics by expanding its
healthcare offerings to include the provision of services of sleep care.
Currently four of the Company’s Equilibre clinics will offer this healthcare
service with plans to expand to the entire network beginning with the region of
Montreal in of
spring 2017, according to the news release.
a result of our analysis, the Investorfile blog recommends that small cap
investors should take advantage of the current stock valuation levels and begin
accumulating shares of Ergoresearch up to a price of $0.40. We forecast that
sometime in fiscal 2018 the Company will achieve a quarterly revenue run rate
of over $4 million ($16 million over 12 months) and earn EBITDA margins of
on our target price and forecast, a small cap investor can accumulate shares of
Ergoresearch at an average cost-base of C$0.31 (the current book value/per
share of the Company) which is a valuation less than six times EV/EBITDA,
making this a small cap value wise investment opportunity. But the Company also has
a significant cash position. Deployment of the cash for acquisition together
with internal growth could drive the stock price of Ergoresearch shares way
beyond our accumulation price target of $0.40.
note at the end of fiscal Q1, Ergoresearch had 72.5 million shares outstanding.
That is 3.66 million fewer shares than the year prior as a result of the
Company repurchasing its shares. Ergoresearch has
obtained the approval of the TSX Venture Exchange to proceed in the normal
course of business to repurchase another 3.62 million of its shares over a 12
month period which began on November 11, 2016. The Company has already
repurchased more of its shares since.
There is high insider ownership in Ergoresearch. The
CEO owns a 21.1% stake in the Company. Currently
Directors and Officers as a group, directly or indirectly, have an ownership
stake which represents 46.7% of the currently outstanding common shares.
Company’s website: www.ergoresearch.com
ownership disclosure: Yes: TSXV: ERG
article is for informational purposes only. This article is based on the
author's independent analysis and judgment and does not guarantee the
information's accuracy or completeness. The information contained in this
article is subject to change without notice, and the author assumes no
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is not engaged in an investor relations agreement with Ergoresearch Ltd. nor
has it received any compensation from Ergoresearch Ltd. for the preparation or
distribution of this article.
author of this article has acquired and may trade shares of Ergoresearch Ltd. through
open market transactions and for investment purposes only.