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Research: TMT
EQS Group’s Q3 results were good, with revenues up 16% to €9.2m, boosted by a strong performance in Investor Relations, up by 28%. This points to the higher end of management’s FY20 target ranges for group revenue and EBITDA and we have lifted our forecasts accordingly. FY21 should be a pivotal year, with the opportunity to sign up clients ahead of the upcoming EU whistle-blower directive. Additional investment is being made to boost sales and marketing, dampening EBITDA in the short term but increasing the medium-term potential, with the €100m revenue target for FY25 intact.
EQS Group |
Stoking up the sales engine |
Q3 results |
Software & comp services |
19 November 2020 |
Share price performance
Business description
Next events
Analyst
EQS Group is a research client of Edison Investment Research Limited |
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EQS Group’s Q3 results were good, with revenues up 16% to €9.2m, boosted by a strong performance in Investor Relations, up by 28%. This points to the higher end of management’s FY20 target ranges for group revenue and EBITDA and we have lifted our forecasts accordingly. FY21 should be a pivotal year, with the opportunity to sign up clients ahead of the upcoming EU whistle-blower directive. Additional investment is being made to boost sales and marketing, dampening EBITDA in the short term but increasing the medium-term potential, with the €100m revenue target for FY25 intact.
Year end |
Revenue (€m) |
EBITDA |
PBT* |
EPS* |
EV/EBITDA |
P/E |
12/18 |
36.2 |
0.2 |
0.7 |
6.1 |
N/A |
N/A |
12/19 |
35.4 |
2.5 |
(0.3) |
(6.3) |
71.8 |
N/A |
12/20e |
38.0 |
4.9 |
1.4 |
13.7 |
37.3 |
N/A |
12/21e |
44.5 |
5.3 |
1.5 |
14.7 |
34.8 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Good underlying progress
The group has made good progress with migrating clients across to its COCKPIT platform and 93% of its Investor Relations customers have now signed new contracts. Revenues have been boosted by the need for companies to deliver their regulatory and communications obligations online due to the COVID-19 pandemic. Once clients are using the platform, it becomes an easier up- or cross-sell to add additional functionality. Compliance segment revenues were up 12% year-to-date (adjusted for last year’s sale of ARIVA), with the number of SaaS customers up 7% y-o-y. The upcoming whistle-blower directive (in the EU initially, but similar regulations are likely to follow elsewhere) presents a clear opportunity for EQS to build its client base. The timing of implementation is end 2021, so companies will need to have a system in place by then, but sales may be skewed to H221.
Investing to grow
We forecast that FY20 results will be at the high end of company guidance, with 9M20 EBITDA already falling within the interval. However, Q4 earnings will be lower as investment is ramped up in sales and marketing to capture the whistle-blowing opportunity. This additional spend will continue in FY21, reflected in our EBITDA forecast, which comes back from €8.5m to €5.3m. While management guidance is in place for FY20 with a target for FY25, the intervening trajectory is not. The implication is that likely profits are more back-end loaded than we had anticipated.
Valuation: Strong FY20 performance
EQS’s share price has performed strongly over the year to date, up by 90%. With the emphasis now moving back onto investment, we believe EV/sales is again the more appropriate valuation metric. Here, the company is valued at around one-third of the large global peers. On a DCF basis, the current share price is discounting a more modest growth rate and margin than outlined by management through to FY25, indicating that there may be some further potential upside.
Financials by quarter
The pattern of trading between segments and by activity is shown below. We would highlight the very high growth being achieved by the cloud-based offering, particularly in the Investor Relations offering. The pandemic has provided fertile territory for selling online communications solutions. While customer numbers have shown only modest growth, there has been some thinning out of those clients not able or willing to transfer onto the new contracts. SaaS customer numbers for Investor Relations are flat year-on-year while those for Compliance are up 7% at 1,326.
Exhibit 1: Quarterly financials
€000s |
Q120 |
Q220 |
Q320 |
Compliance Cloud |
2,670 |
2,870 |
2,540 |
– Growth y-o-y |
18% |
20% |
10% |
Compliance Service |
1,520 |
2,360 |
2,230 |
– Growth y-o-y |
27% |
3% |
3% |
Compliance |
4,190 |
5,230 |
4,770 |
– Growth y-o-y |
20% |
12% |
6% |
IR Cloud |
1,670 |
1,750 |
2,280 |
– Growth y-o-y |
42% |
59% |
50% |
IR Service |
2,490 |
3,120 |
2,120 |
– Growth y-o-y |
11% |
24% |
11% |
IR |
4,160 |
4,870 |
4,400 |
– Growth y-o-y |
22% |
35% |
28% |
Group revenue |
8,350 |
10,104 |
9,166 |
Growth y-o-y |
21% |
22% |
16% |
EBITDA (IFRS) |
799 |
2,197 |
1,299 |
Margin % |
9.6% |
21.7% |
14.2% |
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.
Net debt at the end of the quarter was €7.0m and our modelling indicates a year-end figure of €7.3m, falling to €4.1m by the end of the following year.
Adjusting for investment
As indicated above, we now expect EBITDA to be at the high end of the forecast range. The cumulative EBITDA for Q1–Q3 of €4.3m has already reached management’s previous indicated range for the year (€4.0–5.0m). The quarter by quarter progression is shown in Exhibit 1, above. By maintaining the target range for EBITDA, the implication is that profitability for the final quarter of the year will be notably lower than the levels achieved in Q2 and Q3. We have moved our FY20 EBITDA estimate to the top end if the range, implying a Q4 EBITDA result of €0.6m.
The adjustment to EPS reflects a high tax expenditure in the current year, due to deferred tax liabilities (non-cash).
Exhibit 2: Revisions to forecasts
EPS (c) |
PBT (€m) |
EBITDA (€m) |
|||||||
Old |
New |
% chg. |
Old |
New |
% chg. |
Old |
New |
% chg. |
|
2019 |
(6.3) |
(0.3) |
(0.3) |
2.5 |
2.5 |
||||
2020e |
11.0 |
14.7 |
+34 |
0.6 |
1.4 |
+133 |
4.1 |
4.9 |
+20 |
2021e |
43.1 |
15.7 |
-64 |
4.7 |
1.5 |
-68 |
8.5 |
5.3 |
-38 |
Source: Company accounts, Edison Investment Research
This retrenchment of FY21e EBITDA reflects the investment that the group is putting into place to grasp the time-limited opportunity to build the customer base ahead of the introduction of the Whistleblowing Directive, ie Directive (EU) 2019/1937 on the protection of persons who report breaches of Union law. This was passed in December 2019, with member states given a two-year window to get it onto their statute books. The timing of the demand peak for EQS’s solution could therefore be at any point over the next year.
We have therefore also loaded up the personnel and other expenses for FY21 for additional sales and account management individuals. This makes a considerable reduction in the forecast EBITDA, as shown in the table above. There is no management guidance as yet for FY21 (we would expect this to be published at the publication of the year-end figures) but the company’s ambitions are unchanged for FY25 (see our Outlook note); it aims to achieve revenues of €100m; Compliance growing at a compound rate of 25% to reach €68m; and Investor Relations growing at 15% to reach €32m.
Valuation
A reverse discounted cash flow (DCF), using a weighted average cost of capital (WACC) of 8% and terminal growth rate of 2% beyond 2025, suggests that the current share price is discounting a compound annual growth rate (CAGR) for revenue from FY21–25e of 16.3% on an EBITDA margin of 20% throughout this period. This revenue growth rate is 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 in the platform, and now the step up in investment in the sales resource, affects profitability and the most reliable traditional multiple is once again EV/sales, in our view. There is a wide range of multiples for the peer group, as shown below. For FY21, EQS is trading at 4.1x sales versus the average for the entire peer group of 12.0x. From FY22e, we would expect to resume consideration of EV/EBITDA multiples. EQS is considerably smaller than these other peers, chosen as they provide B2B platforms, often embedded in their clients’ workflows. It is also a much less mature business, so we would expect it to trade at a discount. The size of the appropriate discount is obviously subjective. For illustrative purposes, a 50% discount, averaged across the three years, would indicate a share price of €29.70.
Exhibit 3: Peer ratings
Price (reporting currency) |
Market cap (m) |
Share price changeytd (%) |
EV/sales (x) |
EV/EBITDA (x) |
P/E (x) |
|||||||
FY0 |
FY1 |
FY2 |
FY0 |
FY1 |
FY2 |
FY0 |
FY1 |
FY2 |
||||
Euromoney (£) |
966 |
1,056 |
-26 |
2.8 |
3.4 |
3.4 |
10.1 |
17.0 |
16.5 |
12.5 |
24.8 |
24.2 |
Thomson Reuters (US$) |
83 |
54,299 |
18 |
7.4 |
7.3 |
7.0 |
29.3 |
22.6 |
21.4 |
64.5 |
47.1 |
40.6 |
Envestnet (US$) |
77 |
4,138 |
10 |
5.0 |
4.6 |
4.2 |
23.4 |
19.2 |
18.0 |
35.7 |
31.0 |
29.3 |
Swissquote Group (€) |
83 |
1,266 |
70 |
20.9 |
15.3 |
15.0 |
27.5 |
13.6 |
14.1 |
|||
GlobalData (£) |
1545 |
1,828 |
20 |
10.7 |
10.6 |
10.1 |
42.9 |
36.0 |
32.5 |
53.5 |
54.1 |
48.1 |
MSCI (US$) |
388 |
32,198 |
51 |
22.0 |
20.3 |
18.4 |
40.3 |
35.4 |
31.7 |
60.3 |
49.9 |
46.0 |
S&P Global (US$) |
342 |
82,266 |
25 |
12.8 |
11.7 |
11.4 |
24.9 |
21.3 |
21.0 |
35.9 |
29.9 |
28.8 |
MarketAxess Holdings (US$) |
523 |
19,852 |
38 |
38.2 |
28.6 |
26.1 |
70.4 |
48.6 |
44.2 |
96.8 |
67.9 |
63.5 |
Average |
26 |
15.0 |
12.7 |
12.0 |
34.5 |
28.6 |
26.5 |
48.3 |
39.8 |
36.8 |
||
Median |
23 |
11.8 |
11.2 |
10.8 |
29.3 |
22.6 |
21.4 |
44.7 |
39.1 |
35.0 |
||
EQS (€) |
23.8 |
171 |
90 |
5.2 |
4.8 |
4.1 |
71.8 |
37.3 |
34.8 |
(376.7) |
172.1 |
160.2 |
(Discount)/Premium |
-65% |
-62% |
-66% |
108% |
30% |
32% |
-879% |
333% |
335% |
|||
Source: Refinitiv, Edison Investment Research. Notes: Prices as at 18 November.
Exhibit 4: Financial summary
€'000s |
2018 |
2019 |
2020e |
2021 |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||
Revenue |
|
|
36,210 |
35,367 |
38,000 |
44,500 |
Cost of Sales |
0 |
0 |
0 |
0 |
||
Gross Profit |
36,210 |
35,367 |
38,000 |
44,500 |
||
EBITDA |
|
|
239 |
2,546 |
4,900 |
5,250 |
Operating Profit (before amort. and except.) |
|
|
(1,299) |
(2,441) |
1,400 |
1,750 |
Amortisation of acquired intangibles |
(821) |
(743) |
(600) |
(600) |
||
Exceptionals |
0 |
0 |
0 |
0 |
||
Share-based payments |
0 |
0 |
0 |
0 |
||
Reported operating profit |
(2,120) |
(3,184) |
800 |
1,150 |
||
Net Interest |
1,954 |
2,094 |
5 |
(298) |
||
Joint ventures & associates (post tax) |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
655 |
(347) |
1,405 |
1,452 |
Profit Before Tax (reported) |
|
|
(166) |
(1,090) |
805 |
852 |
Reported tax |
913 |
(322) |
(242) |
(169) |
||
Profit After Tax (norm) |
439 |
(449) |
984 |
1,057 |
||
Profit After Tax (reported) |
747 |
(1,412) |
564 |
682 |
||
Minority interests |
20 |
121 |
35 |
42 |
||
Discontinued operations |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
439 |
(449) |
984 |
1,057 |
||
Net income (reported) |
767 |
(1,291) |
599 |
724 |
||
Average Number of Shares Outstanding (m) |
7,175 |
7,175 |
7,175 |
7,175 |
||
EPS – normalised (c) |
|
|
6.12 |
(6.26) |
13.71 |
14.74 |
EPS – normalised fully diluted (c) |
|
|
6.12 |
(6.26) |
13.71 |
14.74 |
EPS – basic reported (€) |
|
|
0.11 |
(0.18) |
0.08 |
0.10 |
Dividend per share (c) |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
19.3 |
(2.3) |
7.4 |
17.1 |
||
Gross Margin (%) |
100.0 |
100.0 |
100.0 |
100.0 |
||
EBITDA Margin (%) |
0.7 |
7.2 |
12.9 |
11.8 |
||
Normalised Operating Margin (%) |
(3.6) |
(6.9) |
3.7 |
3.9 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
41,219 |
43,827 |
42,516 |
40,471 |
Intangible Assets |
37,293 |
32,008 |
32,459 |
30,414 |
||
Tangible Assets |
2,241 |
8,824 |
8,824 |
8,824 |
||
Investments & other |
1,685 |
2,995 |
1,233 |
1,233 |
||
Current Assets |
|
|
7,250 |
6,004 |
7,055 |
10,975 |
Stocks |
0 |
0 |
0 |
0 |
||
Debtors |
5,030 |
3,751 |
4,030 |
4,719 |
||
Cash & cash equivalents |
1,308 |
1,184 |
1,956 |
5,186 |
||
Other |
912 |
1,069 |
1,069 |
1,069 |
||
Current Liabilities |
|
|
(14,330) |
(14,590) |
(13,727) |
(14,066) |
Creditors |
(1,472) |
(1,848) |
(1,985) |
(2,325) |
||
Tax and social security |
(129) |
(46) |
(46) |
(46) |
||
Short term borrowings |
(6,961) |
(7,173) |
(4,018) |
(4,018) |
||
Other |
(5,768) |
(5,524) |
(7,678) |
(7,678) |
||
Long Term Liabilities |
|
|
(6,013) |
(9,238) |
(9,148) |
(9,148) |
Long term borrowings |
(3,475) |
(7,481) |
(6,125) |
(6,125) |
||
Other long term liabilities |
(2,538) |
(1,757) |
(3,023) |
(3,023) |
||
Net Assets |
|
|
28,125 |
26,003 |
26,697 |
28,232 |
Minority interests |
420 |
(34) |
(50) |
(92) |
||
Shareholders' equity |
|
|
28,545 |
25,969 |
26,647 |
28,140 |
CASH FLOW |
||||||
Op Cash Flow before WC and tax |
3,106 |
4,318 |
4,664 |
4,782 |
||
Working capital |
1,270 |
1,061 |
558 |
50 |
||
Exceptional & other |
(1,646) |
(2,794) |
447 |
67 |
||
Tax |
(135) |
(188) |
(242) |
(169) |
||
Net operating cash flow |
|
|
2,595 |
2,397 |
5,427 |
4,731 |
Capex |
(5,441) |
(3,120) |
(1,500) |
(1,500) |
||
Acquisitions/disposals |
(5,115) |
4,888 |
2,246 |
0 |
||
Net interest |
0 |
0 |
0 |
0 |
||
Equity financing |
0 |
0 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Other |
1,792 |
(4,408) |
0 |
0 |
||
Net Cash Flow |
(6,169) |
(243) |
6,173 |
3,231 |
||
Opening net debt/(cash) |
|
|
3,556 |
9,127 |
13,469 |
7,296 |
FX |
75 |
53 |
0 |
0 |
||
Other non-cash movements |
522 |
(4,153) |
0 |
0 |
||
Closing net debt/(cash) |
|
|
9,127 |
13,469 |
7,296 |
4,066 |
Source: Company accounts, Edison Investment Research
|
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