Ariva acquisition well timed

EQS Group 20 June 2016 Update

EQS Group

Ariva acquisition well timed

Acquisition

Media

20 June 2016

Price

€37.42

Market cap

€45m

Net debt (€m) at end March 2016

5.7

Shares in issue

1.2m

Free float

42%

Code

EQS

Primary exchange

FRA

Secondary exchange

MUN

Share price performance

%

1m

3m

12m

Abs

18.8

26.8

17.7

Rel (local)

22.0

30.3

34.1

52-week high/low

€37.4

€27.6

Business description

EQS is a leading global provider of digital solutions for investor relations and corporate communications. Its solutions and services are provided to more than 7,000 clients worldwide, helping them to fulfil complex domestic and international corporate information requirements.

Next events

Half year figures

26 August 2016

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Bridie Barrett

+44 (0)20 3077 5700

EQS Group is a research client of Edison Investment Research Limited

EQS Group’s increase of its shareholding in Ariva to a controlling stake is well timed ahead of the expected changes to the PRIIPs regulation in January 2017. This regulatory change should drive demand for Ariva’s newly launched PRIIP software, which has the potential to become a significant new product line for the now enlarged group. As the acquisition is earnings accretive, we raise our earnings estimates for both FY16 and FY17, although this is not visible at the EPS level in FY16 as we have taken the opportunity to revise our forecast tax rate for that year.

Year end

Revenue
(€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/14

16.4

3.4

1.83

0.75

20.4

2.0

12/15

18.4

3.1

1.15

0.75

32.5

2.0

12/16e

23.6

3.6

1.68

0.80

22.3

2.1

12/17e

28.9

4.3

2.26

0.85

16.6

2.3

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Ariva: Takes EQS into a new market for KIDs

EQS has increased its ownership of Ariva from 25% to 50% plus one share, giving it a controlling interest in one of Germany’s leading providers of financial data and software solutions. The two companies plan greater co-operation on the cross-selling of solutions. By taking a controlling interest, EQS will share in the expected strong growth from Ariva’s recently launched PRIIP software following the anticipated changes in the regulation in January 2017 relating to the production of key information documents (KIDs).

Forecast changes: Earnings-accretive deal

We are raising our revenue and PBT forecasts to reflect the consolidation of Ariva in EQS’s financials from H216. The price of the acquisition has not been disclosed other than the fact that EQS paid less than it had for the original 25% stake in 2007; we take this to signal a fairly modest price and expect the acquisition to be earnings enhancing from H216. However, we are also taking the opportunity to adjust our FY16 forecast tax charge upwards, which more than offsets the positive impact of this deal in FY16 (FY16 EPS forecast down 7%). We do not expect this higher tax rate to persist into FY17 and therefore raise our FY17 EPS forecast by 12%.

Valuation: Discount remains pronounced

On our pro forma estimates, the forward EV/EBITDA discount on which EQS trades compared to its media and software peers remains pronounced (c 30%). It is worth noting that PR Newswire was sold by UBM for 11.2x historic EBITDA in December 2015 to Cision, backed by GCTR Canyon (now under review by competition authorities). We would expect the discount to peers to close as the benefits of EQS’s international expansion translate into attractive ROIs and future acquisitions enhance earnings further.

Implications of the Ariva acquisition

Deal rational: Enhances PRIIP software solutions

Ariva is a leading provider of financial data and software solutions for financial institutions and operates the financial portal of the same name. It has 80 full-time employees, is headquartered in Kiel and recently opened a Frankfurt sales office. Management expects it to generate revenues of approximately €5.6m and EBIT of €600k this year. The majority of its revenue currently comes from its financial portal (advertising), the supply of derivatives data to financial institutions and media platforms, platform software licences and project work.

It has recently developed and launched a new turnkey software solution, which enables issuers in the financial sector to automatically generate documents for packaged retail investment and insurance-based products (PRIIPs), significantly reducing the administrative burden (currently either banks have developed their own software or generate these reports in a fairly manual way).

The production of these leaflets is already mandatory for non-retail banks. The PRIIPs (packaged retail investment and insurance-based investment products) regulation, which will be mandatory across the EU, is expected to take effect at the beginning of 2017, extending this requirement to retail investment companies and insurance-based products – approximately 8,000 companies across Europe. Ariva already has a high-profile reference client for the software and management plans to leverage EQS’s existing relationships with the financial industry to accelerate the roll-out of this product, which has the potential to become a significant new product line.

Impact on forecasts

Completion is expected towards the end of June. For FY16 we have based our estimates for Ariva on management guidance (revenues €5,600, EBIT €600k). Management has revised its guidance for consolidated sales to €23-23.9m and EBIT to €3.4-3.6m (from €20.2-21.0m revenues and €3.1-3.6m EBIT).

For FY17, we assume 10% revenue growth for Ariva, which would be achievable with a few new client wins for the PRIIP software (with the rest of the business growing at mid-single digit rates). With a strong reference client, limited competition in its core markets and the regulatory deadline looming, our assumptions could prove conservative. Operation margins should also benefit from operational gearing effects as the new solution scales, and we forecast margins rising from 10.7% this year to 14% next year.

The price for the acquisition has not been disclosed other than the fact that EQS has paid less than it did for its original 25% stake (acquired in 2007) and 25% of the purchase price will be financed by its own resources, with the remainder through a new acquisition loan by Commerzbank Munich. Net of the costs of this loan (we assume an additional €20k interest costs), the deal should be earnings enhancing – we raise our FY17 EPS forecast by12%. For the current year, we are adjusting our tax rate upwards to 40% – affected by a mix of profits away from the lower tax regimes in the current year (in particular Asia) – and therefore reduce our FY16 EPS forecast by 7%.

Exhibit 1: Summary forecast changes

€000s

2016e

2017e

Old

New

Change (%)

Old

New

Change (%)

Revenue

20,800

23,600

13%

22,750

28,910

27%

EBIT

2,758

3,130

13%

3,033

3,885

28%

PBT (norm)

3,211

3,560

11%

3,497

4,305

23%

EPS – € (norm)

1.81

1.7

-7%

2.0

2.3

12%

Source: Edison Investment Research

Exhibit 2: Financial summary

€'000s

2013

2014

2015

2016e

2017e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

15,829

16,390

18,377

23,600

28,910

Cost of Sales

0

0

0

0

0

Gross Profit

15,829

16,390

18,377

23,600

28,910

EBITDA

 

 

3,572

3,660

3,485

4,018

4,895

Operating Profit (before amort. and except.)

3,418

3,311

2,983

3,579

4,380

Intangible Amortisation

(140)

(280)

(351)

(520)

(520)

Exceptionals

0

(211)

(268)

0

0

Other

28

177

167

71

25

Operating Profit

3,306

2,997

2,532

3,130

3,885

Net Interest

(29)

(52)

(45)

(90)

(100)

Profit Before Tax (norm)

 

 

3,418

3,436

3,105

3,560

4,305

Profit Before Tax (FRS 3)

 

 

3,278

2,945

2,486

3,040

3,785

Tax

(1,096)

(1,105)

(1,372)

(1,395)

(1,356)

Profit After Tax (norm)

2,283

2,148

1,355

2,001

2,690

Profit After Tax (FRS 3)

2,182

1,841

1,115

1,644

2,429

Average Number of Shares Outstanding (m)

1.19

1.17

1.18

1.19

1.19

EPS - normalised (€)

 

 

1.91

1.83

1.15

1.68

2.26

EPS - (IFRS) (€)

 

 

1.83

1.57

0.95

1.38

2.04

Dividend per share (€)

0.75

0.75

0.75

0.80

0.85

Gross Margin (%)

100.0

100.0

100.0

100.0

100.0

EBITDA Margin (%)

22.6

22.3

19.0

17.0

16.9

Operating Margin (before GW and except.) (%)

21.6

20.2

16.2

15.2

15.2

BALANCE SHEET

Fixed Assets

 

 

13,658

19,383

22,287

28,111

30,196

Intangible Assets

10,524

15,827

17,360

21,094

21,094

Tangible Assets

1,032

1,468

2,796

4,886

6,971

Investments

2,103

2,088

2,131

2,131

2,131

Current Assets

 

 

6,055

4,750

6,972

7,713

9,201

Stocks

0

0

0

0

0

Debtors

2,971

3,282

3,215

5,027

6,358

Cash

2,980

1,370

3,607

2,536

2,693

Other

104

98

150

150

150

Current Liabilities

 

 

(3,274)

(4,380)

(5,325)

(7,414)

(8,127)

Creditors

(2,273)

(2,689)

(3,475)

(5,614)

(6,877)

Short term borrowings

(1,001)

(1,691)

(1,850)

(1,800)

(1,250)

Long Term Liabilities

 

 

(1,070)

(3,882)

(6,805)

(9,838)

(9,838)

Long term borrowings

(982)

(2,500)

(4,767)

(7,800)

(7,800)

Other long term liabilities

(88)

(1,382)

(2,038)

(2,038)

(2,038)

Net Assets

 

 

15,369

15,870

17,129

18,571

21,431

CASH FLOW

Operating Cash Flow

 

 

2,476

4,050

4,989

4,303

4,968

Net Interest

(29)

(52)

(45)

(90)

(100)

Tax

(1,096)

(1,105)

(1,371)

(1,378)

(1,386)

Capex

(3,088)

(1,041)

(1,978)

(1,500)

(1,500)

Acquisitions/disposals

0

(3,669)

(1,046)

(4,500)

(325)

Equity Financing

(202)

(100)

569

0

0

Dividends

(892)

(1,623)

(883)

(890)

(950)

Net Cash Flow

(2,831)

(3,540)

235

(4,055)

707

Opening net debt/(cash)

 

 

(3,827)

(996)

2,821

3,009

7,064

HP finance leases initiated

0

0

0

0

0

Other

0

(277)

(423)

0

0

Closing net debt/(cash)

 

 

(996)

2,821

3,009

7,064

6,357

Source: EQS (historic), Edison Investment Research (forecasts)

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Germany

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London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

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