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Research: TMT
Q119 revenue growth of 9% was a little less than expected due to the lack of IPOs and corporate announcements, but the good pace of corporate sign-ups leaves full year revenue guidance unchanged. EBITDA guidance is also unchanged, but now includes the uplift arising from the application of IFRS 16. As in previous years, meeting the full year expectations will rely on a strong Q4 performance. EQS’s positioning as a provider of cloud-based IR and compliance services for corporates, with growing (recurring) SaaS revenues, remains attractive.
EQS Group |
Building recurring income |
Q1 results |
Software & comp services |
22 May 2019 |
Share price performance
Business description
Next events
Analysts
EQS Group is a research client of Edison Investment Research Limited |
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Q119 revenue growth of 9% was a little less than expected due to the lack of IPOs and corporate announcements, but the good pace of corporate sign-ups leaves full year revenue guidance unchanged. EBITDA guidance is also unchanged, but now includes the uplift arising from the application of IFRS 16. As in previous years, meeting the full year expectations will rely on a strong Q4 performance. EQS’s positioning as a provider of cloud-based IR and compliance services for corporates, with growing (recurring) SaaS revenues, remains attractive.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS |
P/E |
EV/EBITDA (x) |
Yield |
12/17 |
30.4 |
0.8 |
0.16 |
0.00 |
N/A |
44.4 |
N/A |
12/18 |
36.2 |
(1.4) |
(0.19) |
0.00 |
N/A |
N/A |
N/A |
12/19e |
41.8 |
0.0 |
(0.02) |
0.00 |
N/A |
32.6 |
N/A |
12/20e |
49.2 |
3.2 |
1.31 |
0.35 |
52.8 |
18.4 |
0.5 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
IFRS 16-driven changes to forecasts
The introduction of IFRS 16 makes significant changes to the presentation of the accounts, reducing operating expenses by around €1.8m, with changes to depreciation (increased) and financial expenses (reduced). Previous FY19 EBITDA guidance of €1.0–2.0m therefore translates to revised guidance of €2.8–3.8m. Our FY19 EBITDA forecast is now €3.6m (was €1.8m). Except for the IFRS 16 impact, all our underlying assumptions remain unchanged. The capitalisation of leases has also changed the balance sheet presentation, increasing the fixed assets from €2.2m at the year-end to €11.5m at the end of March 2019. Net financial liabilities also increased by €9.6m to €18.76m, but underlying debt levels remain unchanged over the quarter.
Further COCKPIT development
The continuous updating of regulation will provide an advantageous backdrop for EQS, but the key selling points will be security, cost and convenience, as well as the ability to add functionality for its clients without wholesale change. Policy Manager and Integrity Line (the whistleblowing module) could each account for over 20% of Compliance revenues within management’s outline plan to FY25. The investment phase has required higher specialist staffing levels. Personnel costs were up 22% in Q119 to €6.4m, now expected to stabilise, with the cost of freelancers (shown within cost of services) now past the peak requirement.
Valuation: Well underpinned
With profitability suppressed by the additional and slightly prolonged investment phase, traditional valuation multiples are not particularly helpful, barring EV/sales. Larger global financial platform peers are valued on 4.5x FY19e, against EQS on 2.8x, a 38% discount. A reverse DCF suggests an EBITDA margin of c 15% beyond our explicit 2019–20 forecast period is required to arrive at the current share price of €69, compared to management’s targeted 25% by FY23.
Starting to leverage the COCKPIT
EQS recruited 97 new large-cap customers in Q119, putting it on track to meet its target of 400 for the year. The proportion of subscription and recurring revenues will continue to grow as IR clients are migrated across to the new COCKPIT platform and as the new Compliance modules start to build traction. There will be an inherent lag until new signings are reflected in reported revenues.
Exhibit 1: Quarterly trends
Large-cap German clients |
Q118 |
Q218 |
Q318 |
Q418 |
Q119 |
Newly won ARR (€000) |
- |
- |
396 |
281 |
234 |
Recurring revenues |
78% |
86% |
83% |
86% |
81% |
New customers |
12 |
34 |
30 |
31 |
29 |
Total number of customers |
1,081 |
1,115 |
1,143 |
1,166 |
1,187 |
Quarterly revenue per customer (€) |
3,300 |
3,100 |
2,850 |
3,075 |
2,950 |
Customer acquisition cost (€) |
4,200 |
4,200 |
4,500 |
5,350 |
N/A |
Annual churn rate |
- |
0% |
0.2% |
0.7% |
0.7% |
Source: Company accounts
Q119 revenues from the Compliance segment were up 7% on the prior year, a slightly lacklustre figure due to the lack of IPOs to drive regulatory news and announcements drifting into Q2 translating into a reduced requirement for XML, effectively a timing issue. However, the market was good for Legal Entity Identifiers (LEIs) and the whistleblowing software, Integrity Line, has made a good start. A number of high-profile cases being highlighted in the press should help to drive further interest in this product service. The Policy Manager and CRM models are being added onto the platform.
Management anticipates that growth will also come from:
■
Adding elements to the COCKPIT platform, such as third-party due diligence, risk assessment/management and eLearning;
■
expansion into new markets – with France, the UK and Italy in their sights; and
■
extending the reach to include non-listed companies, which will also need to comply with more onerous regulation.
IR revenues were up by 11% in the quarter, boosted by project revenues. In addition to the planned migration of customers onto the COCKPIT (with the ambition to migrate all German clients by the year-end), the forecast growth is predicated on:
■
new products being added, such as CRM and Analytics; and
■
expansion into new markets, particularly the US, Italy and the Nordics.
Exhibit 2: Financial summary
€000s |
2016 |
2017 |
2018 |
2019e |
2020e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
26,061 |
30,355 |
36,210 |
41,785 |
49,175 |
Cost of Sales |
0 |
0 |
0 |
0 |
0 |
||
Gross Profit |
26,061 |
30,355 |
36,210 |
41,785 |
49,175 |
||
EBITDA |
|
|
4,175 |
2,349 |
301 |
3,600 |
6,800 |
Operating Profit (before amort. and except.) |
3,606 |
1,077 |
(1,276) |
166 |
3,366 |
||
Intangible Amortisation |
(943) |
(732) |
(782) |
(862) |
(862) |
||
Exceptionals |
0 |
0 |
0 |
0 |
0 |
||
Other |
(874) |
(146) |
2,128 |
0 |
0 |
||
Operating Profit |
1,788 |
199 |
70 |
(696) |
2,504 |
||
Net Interest |
(14) |
(139) |
(172) |
(205) |
(205) |
||
Profit Before Tax (norm) |
|
|
2,717 |
792 |
(1,448) |
(39) |
3,161 |
Profit Before Tax (FRS 3) |
|
|
1,774 |
60 |
(102) |
(901) |
2,299 |
Tax |
(960) |
(634) |
913 |
14 |
(1,185) |
||
Profit After Tax (norm) |
1,468 |
215 |
(265) |
(27) |
1,877 |
||
Profit After Tax (FRS 3) |
814 |
(574) |
811 |
(886) |
1,114 |
||
Average Number of Shares Outstanding (m) |
1.19 |
1.31 |
1.43 |
1.43 |
1.43 |
||
EPS - normalised (c) |
|
|
123.3 |
16.4 |
(18.5) |
(1.9) |
130.8 |
EPS - (IFRS) (c) |
|
|
43.2 |
(39.3) |
75.3 |
(61.9) |
70.7 |
Dividend per share (c) |
75.0 |
0.0 |
0.0 |
0.0 |
35.0 |
||
EBITDA Margin (%) |
16.0 |
7.7 |
0.8 |
8.6 |
13.8 |
||
Operating Margin (before GW and except.) (%) |
13.8 |
3.5 |
-3.5 |
0.4 |
6.8 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
30,389 |
34,914 |
40,920 |
49,224 |
47,928 |
Intangible Assets |
26,314 |
26,662 |
37,293 |
38,831 |
40,369 |
||
Tangible Assets |
4,075 |
2,129 |
2,276 |
9,042 |
6,208 |
||
Investments |
0 |
6,123 |
1,350 |
1,350 |
1,350 |
||
Current Assets |
|
|
12,014 |
12,536 |
7,250 |
7,791 |
10,562 |
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
4,562 |
5,053 |
5,635 |
5,983 |
6,477 |
||
Cash |
6,610 |
6,374 |
1,308 |
1,501 |
3,777 |
||
Other |
842 |
1,108 |
307 |
307 |
307 |
||
Current Liabilities |
|
|
(9,942) |
(11,559) |
(14,330) |
(14,583) |
(15,446) |
Creditors |
(5,853) |
(5,574) |
(7,240) |
(7,493) |
(8,356) |
||
Short term borrowings |
(4,089) |
(5,986) |
(7,090) |
(7,090) |
(7,090) |
||
Long Term Liabilities |
|
|
(7,237) |
(6,526) |
(5,528) |
(15,128) |
(15,128) |
Long term borrowings |
(4,761) |
(3,946) |
(3,475) |
(13,075) |
(13,075) |
||
Other long term liabilities |
(2,476) |
(2,581) |
(2,053) |
(2,053) |
(2,053) |
||
Net Assets |
|
|
25,224 |
29,363 |
28,312 |
27,304 |
27,915 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
3,827 |
1,850 |
2,899 |
3,770 |
6,991 |
Net Interest |
(13) |
35 |
(169) |
(205) |
(205) |
||
Tax |
(341) |
(238) |
(135) |
(250) |
(1,008) |
||
Capex |
891 |
(4,456) |
(3,292) |
(3,000) |
(3,000) |
||
Acquisitions/disposals |
(3,731) |
(3,148) |
(5,115) |
0 |
0 |
||
Equity Financing |
2,601 |
6,965 |
296 |
0 |
0 |
||
Dividends |
(877) |
(1,939) |
37 |
(122) |
(502) |
||
Net Cash Flow |
2,357 |
(931) |
(5,479) |
193 |
2,276 |
||
Opening net debt/(cash) |
|
|
4,716 |
2,240 |
3,557 |
9,258 |
18,664 |
HP finance leases initiated |
104 |
0 |
(167) |
0 |
0 |
||
Other |
15 |
(386) |
(55) |
(9,600)* |
(0) |
||
Closing net debt/(cash) |
|
|
2,240 |
3,557 |
9,258 |
18,664 |
16,388 |
Source: Company accounts, Edison Investment Research. Note: *FY19e other reflects IFRS 16 changes.
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Research: Financials
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