EQS Group — COVID-19 tailwinds

EQS Group (SCALE: EQS)

Last close As at 27/03/2024

40.80

−0.40 (−0.97%)

Market capitalisation

409m

More on this equity

Research: TMT

EQS Group — COVID-19 tailwinds

EQS delivered a good first half performance, boosted by companies’ needs to adapt their communications strategies to the impact of the COVID-19 pandemic. Revenue guidance for the year has been tilted to the higher end of the previous range and EBITDA guidance lifted by €0.5m to $4.0–5.0m. We have lifted our forecast from €3.5m to €4.1m, rising to €8.5m for FY21e as the scalability of the platform helps improve margins. With the group now over the peak investment in its cloud-based COCKPIT software, free cash flow is on a clear improving trend. The share price has recovered well from the market setback in March but remains on a discount to peers.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

EQS Group

COVID-19 tailwinds

H1 figures

Software & comp services

17 August 2020

Price

€106.00

Market cap

€148m

Net debt (€m) at 30 June 2020 (non-IFRS)

3.7

Shares in issue

1.4m

Free float

69%

Code

E1SX

Primary exchange

XETRA

Secondary exchange

FRA

Share price performance

%

1m

3m

12m

Abs

8.6

27.4

67.2

Rel (local)

6.9

2.1

48.9

52-week high/low

€110.00

€50.00

Business description

EQS is a leading international provider of regulatory technology in the fields of corporate compliance and investor relations. Its products enable corporate clients to fulfil complex national and international disclosure obligations, minimise risks and communicate transparently with stakeholders.

Next events

Q3 figures

13 Nov 20

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Dan Ridsdale

+44 (0)20 3077 5729

EQS Group is a research client of Edison Investment Research Limited

EQS delivered a good first half performance, boosted by companies’ needs to adapt their communications strategies to the impact of the COVID-19 pandemic. Revenue guidance for the year has been tilted to the higher end of the previous range and EBITDA guidance lifted by €0.5m to €4.0–5.0m. We have lifted our forecast from €3.5m to €4.1m, rising to €8.5m for FY21e as the scalability of the platform helps improve margins. With the group now over the peak investment in its cloud-based COCKPIT software, free cash flow is on a clear improving trend. The share price has recovered well from the market setback in March but remains on a discount to peers.

Year end

Revenue (€m)

EBITDA (€m)

PBT*
(€m)

EPS*
(€)

EV/EBITDA
(x)

P/E
(x)

12/18

36.2

0.2

0.7

0.31

N/A

N/A

12/19

35.4

2.5

(0.3)

(0.31)

65.6

N/A

12/20e

37.2

4.1

0.6

0.55

40.7

N/A

12/21e

43.5

8.5

4.7

2.15

19.6

49.7

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

Pandemic boosts corporate communications

Having delivered a positive first quarter EBITDA for the first time since Q117, Q220 progress was stronger still, building from €0.8m to €2.2m. The need for companies to communicate, particularly in the early phases of lockdown, helped drive Investor Relations revenues ahead by 28% over H119 (adjusted for the ARIVA disposal in July 2109). News revenues were up by 26% and there was a 98% uplift in video and audio webcasts revenue versus H119. EQS also ran over 50 virtual AGMs in the period, permitted under new COVID-19-specific regulation. On the downside, there were only six IPOs and the sales cycle for new clients was elongated. Despite this, Compliance revenues were up 16% on the prior year (adjusted for ARIVA).

Building recurring revenues and controlling costs

The group added 151 new SaaS customers in H1 (Q1: +64, Q2: +87), in line with the expectations for the year of adding 300–350 (albeit at the lower end), and logging €2.9m of newly acquired annualised recurring revenue. There is a structural lag in these new revenues being reflected in the reported revenue numbers, which gives a degree of confidence to our (reinstated) FY21e forecasts. With the new phase of the group’s development, software development costs are reduced and there has been close control of spending due to COVID-19, with H120 operating expenses 2% lower than H119. Management could accelerate the margin expansion, but its ambitions are more centred on sustainable growth. This requires increased sales and marketing spend, as well as client account management.

Valuation: Starting to reflect growth

Having been marked down sharply with the market in March, EQS’s share price has since doubled as it has become clearer that the group is a potential beneficiary of the circumstances. The strong forecast progress on EBITDA for FY21e now puts the shares on a 24% discount to larger global peers on EV/EBITDA.

Strong progress in H120

The effect of the pandemic on corporate concerns has been considerable across H120, with the consequences for EQS mostly favourable. We had been anticipating that FY20 would be the year that the earlier cloud investment programme would start to pay off, particularly in the Compliance segment, where regulation and complexity have been greatly increasing the burden on companies trying to fulfil their obligations. The COVID-19 boost has been more strongly felt in the Investor Relations segment, as shown in the Exhibit below.

Financials by quarter

Exhibit 1: Quarterly financials

€000s

Q119

Q219

H119

Q120

Q220

H120

- Compliance Cloud

2,270

2,390

4,660

2,670

2,870

5,540

- Growth y-o-y

18%

20%

19%

- Compliance Service

1,200

2,300

3,500

1,520

2,360

3,880

- Growth y-o-y

27%

3%

11%

Compliance

3,470

4,690

8,160

4,190

5,230

9,420

- Growth y-o-y

20%

12%

15%

- IR Cloud

1,180

1,100

2,280

1,670

1,750

3,420

- Growth y-o-y

42%

59%

50%

- IR Service

2,240

2,510

4,750

2,490

3,120

5,610

- Growth y-o-y

11%

24%

18%

IR

3,420

3,610

7,030

4,160

4,870

9,030

- Growth y-o-y

22%

35%

28%

Revenue

6,890

8,316

15.206

8,350

10,104

18,454

Growth y-o-y

21%

22%

21%

EBITDA ex IFRS 16*

(889)

126

(763)

310

1,710

2,020

Margin %

(12.9%)

1.5%

(5.0%)

3.7%

16.9%

10.9%

EBITDA

(428)

321

(107)

799

2,197

2,996

Margin %

(6.2%)

3.9%

(0.7%)

9.6%

21.7%

16.2%

Source: EQS Group, Edison Investment Research. Note: *IFRS 16 not adopted retrospectively; comparisons exclude ARIVA (disposed July 2019); segments may not tally due to rounding.

Management has clarified the elements currently delivered within these segments, which should make it easier to identify trends in future reporting periods.

Exhibit 2: Product offering segmentation

Compliance

Investor Relations

Cloud (SaaS)

Disclosure

Newswire

Integrity line

CRM

Policy manager

Mailing

Insider manager

Investors

Approval manager

Service

Filings (to Federal Gazette)

Websites

Legal entity identifiers (LEI)

Webcasts

Tools

Reports

Virtual AGM

Media

Source: EQS Group

The cloud-based offerings are the key to the group’s scalability, with the scope of the individual offerings circumscribed by the regulations in any region rather than the need to be tailored by client. New regulations, such as the whistleblowing rules being introduced in the EU from December 2021, give new opportunities to cross-sell to existing clients. They also give a good opportunity to sell into new clients, which can then be introduced to other elements of the offering.

There are competitors, but they tend to be either local specialists (by market or by activity) or the large US-based suppliers. To our knowledge, there is currently no other pan-European provider with the breadth of product offering and/or cloud-based delivery.

Investment versus margin management

While the initial sale is inevitably a hurdle, once a client relationship is established, EQS can concentrate on the cross- and up-sells of additional software functionality – the key driver of medium-term growth. The pandemic has undoubtedly made it more time-consuming to get new clients across the line, but there has been good progress.

As can be seen in Exhibit 1 above, there has been a substantial step up in EBITDA margin in H120. Management guides to a current year range for both revenue and EBITDA and also gives its ambitions for FY25e (for more details on this, please see our January 2020 Outlook). With these results, we have left our revenue forecast unchanged (it was mid-range and is now at the low end), implying H2 revenues of €18.7m, just a little ahead of the €18.5m achieved in H120. We have raised our EBITDA forecast from €3.5m to €4.1m (guided range €4.0–5.0m). This therefore assumes a dip in EBITDA margin for the second half back down to 5.9%. Some of this reflects higher operating costs with an element of loosening of the restraints imposed on cash utilisation in response to the pandemic (travel, recruitment etc). The larger element, though, is greater investment in the group’s go-to-market strategy. This is particularly focused on improving EQS’s online presence, through advertising but also through more strategic use of platforms such as LinkedIn, for disseminating thought leadership pieces, and through activities such as its first European Compliance & Ethics Conference (ECEC) this October.

The likely retrenchment in H220 EBITDA margin to 5.9% as per our modelling, from the 16.2% achieved in H120, is therefore down to a deliberate investment in building longer-term sustainability. Our modelling for FY21 assumes that the EBITDA margin moves ahead to 19.5%. Again, we could justify a higher figure on a short-term horizon, but we are conscious of management’s ambitions to FY25 and beyond. These targets for FY25 are for group revenue to reach €100m, with the growth in Compliance the larger driver, taking it to 68% of the group from 56% in FY19. The anticipated CAGR for Compliance is in a range of 20–30% as systems and reporting are increasingly digitised and automated, on an ever-growing burden of regulation on corporate entities.

The group has a sound balance sheet to realise these ambitions. Net debt at the end of June was €3.7m on a non-IFRS basis (€10.5m including leases). With capital investment now more at maintenance levels, our model indicates positive free cash flow and reducing debt levels.

Valuation

A reverse DCF, using a WACC of 8% and terminal growth rate of 2% beyond 2025 suggests that the current share price is discounting a CAGR for revenue from FY21–25e of just 8% on an EBITDA margin of 20% throughout this period. This revenue growth rate is well below management’s expectations, which imply a revenue CAGR of 18.9% through to FY25, and the EBITDA margin of 20% is significantly below the 30% expected by management by FY25.

The scale of the internal investment has affected recent profitability and the most reliable traditional multiple has therefore been that of EV/Sales. There is a wide range of multiples for the peer group, as shown below. For FY20, EQS is trading at 4.5x sales versus the median for the entire peer group of 12.0x. With EQS’s EBITDA forecasts now rising notably, comparative EV/EBITDA multiples are becoming more relevant. While the group is still trading at a premium for the current year of 42%, the expected step up in EBITDA margin pushes this to a 24% discount for FY21e. Parity with peers on this basis would imply a share price of €144.

Exhibit 3: Peer valuations

Price

Market

Perf ytd

EV/sales (x)

EV/EBITDA (x)

PE (x)

(in reporting

cap (m)

(%)

FY0

FY1

FY2

FY0

FY1

FY2

FY0

FY1

FY2

Currency)

Euromoney (£)

840.0

919

-36

2.5

2.9

2.6

8.8

15.9

11.0

10.8

22.6

14.7

Thomson Reuters (US$)

75.7

49,570

8

6.8

6.7

6.5

27.0

21.1

19.9

58.7

41.6

38.1

Envestnet (US$)

85.3

4,586

23

5.6

5.2

4.7

26.3

22.8

20.2

39.7

36.8

32.6

Swissquote Group (€)

83.6

1,281

72

20.9

16.8

15.7

27.9

16.5

16.1

Globaldata (£)

1690.0

1,999

31

11.7

11.6

11.0

46.7

39.1

35.4

58.5

59.2

52.6

MSCI (US$)

354.8

29,672

37

20.3

18.9

17.2

37.2

33.5

30.1

55.1

49.1

43.4

S&P Global (US$)

349.2

84,155

28

13.1

12.3

11.8

25.5

22.8

21.9

36.6

31.8

30.2

Marketaxess Holding (US$)

492.5

18,703

30

35.8

27.1

25.0

65.9

46.0

42.8

91.2

64.9

61.8

Average

24.2

14.6

12.7

11.8

33.9

28.7

25.9

47.3

40.3

36.2

Median

28.9

12.4

12.0

11.4

27.0

22.8

21.9

47.4

39.2

35.4

EQS (€)

107.0

153.5

71.2

4.7

4.5

3.8

65.6

40.7

19.6

(341.6)

195.2

49.7

(Premium)/Discount to peer group median

-68%

-65%

-67%

93%

42%

-24%

-822%

384%

37%

Source: Refinitiv, Edison Investment Research. Priced at 13 August 2020

Exhibit 4: Financial summary

€'k

2017

2018

2019

2020e

2021e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

30,355

36,210

35,367

37,200

43,500

Cost of Sales

0

0

0

0

0

Gross Profit

30,355

36,210

35,367

37,200

43,500

EBITDA

 

 

2,350

239

2,546

4,100

8,500

Operating Profit (before amort. and except.)

 

 

1,042

(1,299)

(2,441)

600

5,000

Amortisation of acquired intangibles

(696)

(821)

(743)

(600)

(600)

Exceptionals

0

0

0

0

0

Share-based payments

0

0

0

0

0

Reported operating profit

346

(2,120)

(3,184)

(0)

4,400

Net Interest

(302)

1,954

2,094

5

(298)

Joint ventures & associates (post tax)

17

0

0

0

0

Exceptionals

0

0

0

0

0

Profit Before Tax (norm)

 

 

757

655

(347)

605

4,702

Profit Before Tax (reported)

 

 

61

(166)

(1,090)

5

4,102

Reported tax

(634)

913

(322)

1

(1,388)

Profit After Tax (norm)

507

439

(449)

786

3,089

Profit After Tax (reported)

(573)

747

(1,412)

6

2,714

Minority interests

0

20

121

35

42

Discontinued operations

0

0

0

0

0

Net income (normalised)

507

439

(449)

786

3,089

Net income (reported)

(573)

767

(1,291)

41

2,756

Average Number of Shares Outstanding (m)

1,372

1,435

1,435

1,435

1,435

EPS - normalised (€)

 

 

0.37

0.31

(0.31)

0.55

2.15

EPS - normalised fully diluted (€)

 

 

0.37

0.31

(0.31)

0.55

2.15

EPS - basic reported (€)

 

 

(0.42)

0.53

(0.90)

0.03

1.92

Dividend per share (c)

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

16.5

19.3

(2.3)

5.2

16.9

Gross Margin (%)

100.0

100.0

100.0

100.0

100.0

EBITDA Margin (%)

7.7

0.7

7.2

11.0

19.5

Normalised Operating Margin (%)

3.4

(3.6)

(6.9)

1.6

11.5

BALANCE SHEET

Fixed Assets

 

 

34,914

41,219

43,827

44,278

42,233

Intangible Assets

26,662

37,293

32,008

32,459

30,414

Tangible Assets

2,048

2,241

8,824

8,824

8,824

Investments & other

6,203

1,685

2,995

2,995

2,995

Current Assets

 

 

12,536

7,250

6,004

9,261

14,852

Stocks

0

0

0

0

0

Debtors

4,458

5,030

3,751

3,945

4,613

Cash & cash equivalents

6,374

1,308

1,184

4,247

9,170

Other

1,703

912

1,069

1,069

1,069

Current Liabilities

 

 

(11,559)

(14,330)

(14,590)

(14,686)

(15,015)

Creditors

(1,101)

(1,472)

(1,848)

(1,944)

(2,273)

Tax and social security

(290)

(129)

(46)

(46)

(46)

Short term borrowings

(5,986)

(6,961)

(7,173)

(7,173)

(7,173)

Other

(4,183)

(5,768)

(5,524)

(5,524)

(5,524)

Long Term Liabilities

 

 

(6,526)

(6,013)

(9,238)

(9,238)

(9,238)

Long term borrowings

(3,946)

(3,475)

(7,481)

(7,481)

(7,481)

Other long term liabilities

(2,581)

(2,538)

(1,757)

(1,757)

(1,757)

Net Assets

 

 

29,363

28,125

26,003

29,615

32,832

Minority interests

1,922

420

(34)

(419)

(811)

Shareholders' equity

 

 

31,286

28,545

25,969

29,196

32,021

CASH FLOW

Op Cash Flow before WC and tax

1,431

3,106

4,318

4,106

6,814

Working capital

(818)

1,270

1,061

601

61

Exceptional & other

2,011

(1,646)

(2,794)

204

1,286

Tax

(872)

(135)

(188)

1

(1,388)

Net operating cash flow

 

 

1,752

2,595

2,397

4,913

6,773

Capex

(3,482)

(5,441)

(3,120)

(1,500)

(1,500)

Acquisitions/disposals

(3,148)

(5,115)

4,888

0

0

Net interest

(104)

0

0

0

0

Equity financing

7,859

0

0

0

0

Dividends

0

0

0

0

0

Other

(3,140)

1,792

(4,408)

(350)

(350)

Net Cash Flow

(263)

(6,169)

(243)

3,063

4,923

Opening net debt/(cash)

 

 

2,240

3,556

9,127

13,469

10,406

FX

(386)

75

53

0

0

Other non-cash movements

(667)

522

(4,153)

0

0

Closing net debt/(cash)

 

 

3,556

9,127

13,469

10,406

5,484

Source: Company accounts, Edison Investment Research

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NSW 2000, Australia

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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