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Cello Group has scope for re-rating once it proves itself says broker

Global pharmaceutical R&D is forecast to reach $182bn by 2022 having grown at near 4% annually since 2006
Mark Scott, Cello Group

A name change to Cello Health Group PLC (LON:CLL) highlights the shift in focus underway at the specialist marketing group.

Brands have been unified under the new name to establish a broad, cohesive service across of its platforms.

WATCH: Cello Group name change reflects growing credibility in healthcare, says CEO Scott

House broker finncap says the aim is to help the pharma majors drug development programmes through assessing market opportunities, commercial risk and routes to market.

While you might think these juggernauts do all this for themselves, finncap adds this is not the case and the market for Cello’s technically based, strategic marketing services is strong and defensive.

Global pharmaceutical R&D is forecast to reach $182bn by 2022 having grown at near 4% annually since 2006.

Double-digit growth

“The evidence from competitors is that double-digit earnings growth is readily achievable and will be rewarded by a P/E of 20x+,” said the broker.

That would amount to a substantial re-re-rating of the share price, as on the broker’s forecasts for adjusted profits this year (2018) the rating is around 13 at 113p.

In 2017, revenues rose 2% to £169.3mln, and by 2.5% like-for-like, while underlying profits were 12% better at £11.4mln.

Pre-tax profits came in at £5.8mln against a loss of £1.7mln while there was a dividend of 3.5p.

Cello Health picked up 49 new clients in 2017 and has now worked with 24 of the top 25 pharmaceutical companies.

The US contributed 45% of Cello Health's gross profit and 30% of group gross profit, with a stronger dollar also helping last year.

Signal, Cello’s other division, saw its profit contribution dropped to £3.87mln as two contracts in 2016 did not repeat.

Going forward it will focus more on support for the health business.

Broker sees clear opportunity

Cello has to prove the benefits of the shift towards health, adds finncap, but with net cash and the potential also to leverage its digital expertise into health there is clear opportunity.

The company had net cash of £1.6mln at December and debt facilities of £20mln.

That is is enough firepower for more acquisitions and though high valuations are a challenge, and management has a strict focus on value, bolt-ons should support the growth story, adds the broker.

"For now, we value Cello at a 20% discount to peers, setting a 145p target."

“As the growth potential is proved, we should be able to remove the discount.”




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