Compliant digital solutions

EQS Group 12 April 2019 Scale Update
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EQS Group

Compliant digital solutions

Media

Scale research report - Update

12 April 2019

Price

€73.50

Market cap

€105m

Share price graph

Share details

Code

EQS

Listing

Deutsche Börse Scale

Shares in issue

1.43m

Net debt (€m) as at 31 Dec 2018

9.1

Business description

EQS Group is a leading international technology provider for digital investor relations, corporate communications and compliance. It has over 8,000 client companies worldwide using its products and services to securely, efficiently and simultaneously fulfil complex national and international information obligations to the global investment community.

Bull

Financial market regulation.

Opportunities in governance and risk.

High percentage of recurring and repeatable income.

Bear

In investment phase.

EBIT margin yet to trend up.

Dividend payment on hold.

Analysts

Fiona Orford-Williams

Russell Pointon

+44 (0)20 3077 5739

+44 (0) 20 3077 5757

EQS’s FY18 results were broadly as expected, with a strong uplift in the top line. The planned investment, designed to build a global regulatory tech platform business, affected profit as flagged. FY20e should be the year when the benefits start to flow more strongly as the group builds share (and SaaS revenues) in the increasingly digital governance, risk and compliance segment. With additional functionality being added to the cloud-based platform and growing recurring revenues (80% of total), both the quantum and the quality of earnings are increasing.

Faster growth from Compliance

The potential for growth from the Compliance segment outstrips that from corporate IR. In FY18, the difference in dynamic was exaggerated by weak media and advertising revenues within IR, which held revenues from the segment flat, while Compliance revenues grew strongly (+46%), albeit off a smaller base. Compliance contributed 51% of FY18 revenues. Reported financial income was boosted by a one-off put option reversal for ARIVA, which generated €2.1m. Regulatory changes should have a beneficial impact between FY19–FY21, driving the whistleblowing module and the volume of corporate announcements that need to be logged. EQS is now concentrating its efforts on European markets and has closed its operation in Dubai. Forecasts, based on guidance, indicate a recovery in FY19e IR growth to 15% and Compliance growth moderating to (a still strong) 16%.

COCKPIT platform growing in scope

Spend on platform development in FY18 was €6.1m (€2.3m capitalised), making it the peak year of the €9.3m investment programme. During FY19e, CRM and Policy Manager in the Corporate Compliance segment are set to be added to the COCKPIT integrated workflow platform and in IR, CRM and Investor Management will join. We anticipate that the benefit of these additions will be more obvious within the numbers in the second half of the year.

Valuation: Well underpinned

With profitability suppressed by the investment, traditional valuation multiples are not particularly helpful, barring EV/sales. Larger global financial platform peers are valued on 4.4x FY19e, against EQS on 2.7x, a 39% discount.

Consensus estimates

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

EV/EBITDA
(x)

Yield
(%)

12/17

30.4

0.8

0.16

0.00

N/A

47.1

0.0

12/18

36.2

(1.4)

(0.19)

0.00

N/A

N/A

0.0

12/19e

42.1

(1.0)

(0.98)

0.00

N/A

161.5

0.0

12/20e

49.4

2.2

0.71

0.18

103.5

31.2

0.2

Source: Refinitiv

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Clear investment case

The narrative of the investment case is unchanged on these results. EQS offers a cloud-based platform to manage the digital workflow of IR, communications and compliance professionals. The reorientation needed to grow in the compliance market has/will cost in diminished profits from FY17 to FY19e but the longer-term goal is sufficiently attractive to justify the investment. The timing of front-end loading of the investment is necessary to establish a strong offering as the market shift to digital accelerates. European markets are on the radar of the large US providers, but lower in their priorities, with local incumbents better placed to navigate the complexities of corporate regulation. Regulation has been, and will continue to be, a key business driver.

EQS’s cloud-based architecture is based on the COCKPIT platform, built with the flexibility to add and adapt modules. The main elements are:

INVESTORS. This maps IR work processes against global investor data, increasingly important post the implementation of MiFID II. All German clients are scheduled to be transferred onto COCKPIT through FY19.

CRM for independent use and in conjunction with other elements

INSIDER MANAGER. A digital way to keep track of insiders under the EU Market Abuse Regulation

POLICY MANAGER (scheduled to go live Q219). This will manage all a company’s policies in one platform and create workflows to handle confirmations that the relevant individuals have accessed them to ensure compliance.

INTEGRITY LINE. Originating in Germany, this whistleblowing module should benefit from the roll-out of EU regulation, likely to be from FY20 on. The indication that whistleblowers should be able to report through a channel of their own choice should stimulate corporate demand – they will want to be the first to know.

LEI MANAGER. EQS has provided an efficient route for Legal Identity Identifiers to be issued, which has propelled it to being one of the largest issuers.

FY20e: The year returns start flowing

Unchanged company guidance shows FY19e revenues growing to between €41.5m and €43.5m. For EBITDA, guidance is for a broad range of €1m to €2m, as much depends on the timing of module launches and transition of clients to the COCKPIT platform. In view of this element of uncertainty, we would anticipate that EBITDA will be weighted to H2.

KPIs show progress

Exhibit 1: FY18 quarterly trends

Large-cap German clients

Q118

Q218

Q318

Q418

ARR (€000)

-

-

396

281

Recurring revenues

78%

86%

83%

86%

New customers

12

34

30

31

Total number of customers

1,081

1,115

1,143

1,166

Qly rev per customer (€)

3,300

3,100

2,850

3,075

Customer acquisition cost (€)

4,200

4,200

4,500

5,350

Ann Churn rate

-

0%

0.2%

0.7%

Source: Company accounts

The trends in large-cap German clients are a reasonable broad lead indicator for the rest of the business. For the business as a whole, recurring revenues were running at 80% for FY18. A new KPI will be disclosed in FY19e, ARR, being annual contracted recurring business volume. The published target for this is €4.0m, which would be mostly from new products. The group is also targeting winning business from 400 new large-cap clients.

Although prospects in the group’s domestic market, Germany, are good, the strongest growth in FY19 is likely to be seen in France and Switzerland. A pick up in the number of IPOs is also a helpful trend.

As will be a common feature of FY19, EQS will start to report under IFRS 16 from Q119. This is likely to have the impact of increasing EBITDA, as property leases will be reflected on the balance sheet and be subject to depreciation. Q118 figures will be shown on the same basis to aid comparison.

Continuing external revenue drivers

The flow of regulation is unlikely to stop any time soon. Specifically:

German regulations on increasing the transparency of bank nominee shareholdings will come in to enable publication within annual reports and accounts from FY19. This could lead to further opportunities for EQS, depending on how the banks and clearing houses decide to fulfil their obligations.

Whistleblowing, as mentioned above. The EU Parliament is set to clarify its intentions, while laws in each EU country will need to be passed to facilitate whistleblowing arrangements.

From FY20, companies will need to file their accounts (income statement, balance sheet, cash flow and reconciliation) in XBRL format, starting with the most regulated companies, typically larger, quoted, and then extending out more broadly. EQS already offers XML format, so using them for XBRL filing in addition is an easy option.

To gain the greatest leverage from these, EQS needs to continue to promote its brand and its offering, particularly as it is often dealing with different procurement departments and individuals within client organisations.

Valuation

Financial publishing and business service peers

We regard the quoted financial publishing and business services companies to be the most appropriate peers, given that the group is now effectively a platform business.

Exhibit 2: Quoted financial platform stocks

Name

ytd performance (%)

price - reporting currency

Market cap (m)

EV/Sales 1FY (x)

EV/EBITDA last (x)

EV/EBITDA 1FY (x)

EV/EBITDA 2FY (x)

PE last (x)

PE 1FY (x)

PE 2FY (x)

EUROMONEY (£)

9

12.56

1,372

3.2

11.3

15.9

14.6

15.4

21.4

20.2

THOMSON REUTERS (C$)

22

59.02

29,598

5.4

21.6

21.4

16.1

72.3

53.1

31.8

ENVESTNET ($)

38

67.83

3,307

3.8

37.9

19.2

15.7

31.7

26.3

SWISSQUOTE (€)

(14)

38.70

594

12.8

12.8

11.1

GLOBALDATA (£)

1

5.93

700

4.3

40.4

18.4

16.5

25.8

22.5

MSCI ($)

46

215.00

18,200

12.9

25.7

23.7

21.2

40.8

35.4

30.7

S&P GLOBAL ($)

26

213.44

52,588

8.2

18.7

16.9

15.7

25.1

23.5

21.2

MARKETAXESS ($)

22

258.81

10,504

42.5

37.4

32.9

56.7

51.0

44.4

WILMINGTON (£)

19

2.12

186

1.9

14.0

9.3

8.8

11.8

10.9

Average

4.4

26.5

20.3

17.7

37.2

29.6

24.3

Source: Refinitiv, Edison Investment Research. Note: Prices at 11 April 2019, averages excluding outliers.

Given the earnings numbers are suppressed by the investment phase, the only remaining available traditional multiple is that of EV/sales. For FY1 EQS is trading at a 39% discount to the global peer set of quoted financial platform stocks. Due to the current low level of profitability, EQS trades at a substantial premium on earnings’ multiples.


General disclaimer and copyright

This report has been commissioned by EQS Group and prepared and issued by Edison, in consideration of a fee payable by EQS Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by EQS Group and prepared and issued by Edison, in consideration of a fee payable by EQS Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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