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Research: TMT
The German Bundesrat has finally transposed the legislation regarding whistleblowing after the unexpected delay, allowing EQS to move at full steam to start converting its sales pipeline. The Q123 figures show a good start to the year, despite the hold-up, as the implementation of similar whistleblowing legislation stimulated demand in markets such as Italy and Spain. Revenues (excluding Russia) were up 15% on Q122 and EBITDA margin recovered to 8.5% from 0.9%, putting the group on track to meet its full-year guidance. The shares continue to trade well below the level indicated by our DCF.
EQS Group |
Catching the whistleblowing wave |
Trading update |
Software |
19 May 2023 |
Share price performance
Business description
Next events
Analyst
EQS Group is a research client of Edison Investment Research Limited |
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The German Bundesrat has finally transposed the legislation regarding whistleblowing after the unexpected delay, allowing EQS to move at full steam to start converting its sales pipeline. The Q123 figures show a good start to the year, despite the hold-up, as the implementation of similar whistleblowing legislation stimulated demand in markets such as Italy and Spain. Revenues (excluding Russia) were up 15% on Q122 and EBITDA margin recovered to 8.5% from 0.9%, putting the group on track to meet its full-year guidance. The shares continue to trade well below the level indicated by our DCF.
Year end |
Revenue |
EBITDA |
PBT* |
EPS* |
EV/EBITDA |
P/E |
12/21 |
50.2 |
1.7 |
(5.4) |
(0.65) |
160.5 |
N/A |
12/22 |
61.4 |
4.6 |
(3.1) |
(0.20) |
61.2 |
N/A |
12/23e |
71.5 |
9.1 |
0.6 |
0.04 |
30.7 |
684.7 |
12/24e |
88.8 |
16.2 |
8.2 |
0.55 |
17.3 |
46.1 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items, and share-based payments.
Compliance ramping up…
Cloud-based Compliance products and services (69% of Q123 revenue) continue to drive the top line, with products up 15% and services racking up an impressive gain of 31% over Q122, albeit off a lower base. The number of Compliance SaaS customers reached just below 4k by end-March, including 238 new SaaS customers for whistleblowing systems as sales in France, Spain and Italy start to come through more strongly. The lack of initial public offerings hampered growth in the Investor Relations segment (31% of Q1 revenue), although there was modest progress in SaaS revenues for EQS’s IR COCKPIT. Operational leverage and tight cost control helped boost the EBITDA margin (excluding Russia) to 8.5% (Q122: 0.9%), with full-year FY23e guidance in a range of 12–15% unchanged, based on revenues of €71–74m and EBITDA of €9–11m. Our estimates are maintained.
…with Germany following on
The big prize for EQS is its own domestic market. The pipeline has been built up, but conversion has been an issue while the implementation of the legislation was in abeyance. With a very short timeline to full go-live of one month, the next few weeks should be extremely busy, with partner sales to second- and third-tier customers also now green-lit. Management indicates around 2k opportunities in the sales pipeline. In the longer term, regulation regarding supply chain and additional ESG reporting should provide further impetus, with both this and the whistleblowing product giving further openings for cross- and up-sells to the COCKPIT platform.
Valuation: DCF indicates upside potential
Given the current suppressed levels of profitability, traditional valuation multiples remain unhelpful. We therefore use a DCF, with a 9% weighted average cost of capital and terminal growth of 2% (unchanged). This derives a value of €35.17 per share (April 2023: €34.82), well above the current market price, despite the recent bounce in the share price in response to the progress of the German legislation.
Q123 results compatible with full-year guidance
The Q123 group results are summarised below. The accounting basis now shows the Russian business as discontinued (this was negligible in Q123, at €28k of revenue and decreasing, and with a negative EBITDA of €57k) and is already factored into the full-year guidance. We will adjust our modelling of the historical numbers at the half-year stage.
Exhibit 1: Q123 summary of results and full-year guidance
Group total |
Continuing (excluding Russia) |
||||||
€m |
Q123 |
Q122 |
% change |
Q123 |
Q122 |
% change |
Full-year guidance |
Compliance revenues |
|||||||
Cloud products |
8.29 |
7.19 |
15% |
||||
Service products |
2.79 |
2.12 |
31% |
||||
Total compliance |
11.08 |
9.31 |
19% |
||||
Investor Relations revenues |
|||||||
Cloud-products |
2.66 |
2.56 |
4% |
||||
Service-products |
2.23 |
2.25 |
-1% |
||||
Total Investor Relations |
4.90 |
4.81 |
2% |
||||
Group revenues |
15.97 |
14.12 |
13% |
15.94 |
13.81 |
15% |
€71–74m |
EBITDA |
1.30 |
0.25 |
417% |
1.36 |
0.12 |
1033% |
€9–11m |
EBITDA margin |
8.2% |
1.8% |
8.5% |
0.9% |
12–15% |
||
EBIT |
(0.70) |
(1.77) |
N/A |
(0.65) |
(1.89) |
N/A |
|
Personnel expenses |
10.47 |
9.41 |
11% |
10.42 |
9.34 |
12% |
|
New annually recurring revenue (ARR) |
1.86 |
1.81 |
3% |
€9.0–12.0m |
|||
ARR |
14.0 |
12.4 |
13% |
||||
New SaaS customers |
271 |
216 |
25% |
2,000–3,000 |
|||
Total customers |
5,257 |
4,405 |
19% |
||||
Churn |
5.6% |
5.7% |
|||||
Source: EQS Group
Targets unchanged
In our June 2022 Outlook note, we documented management’s ambition for its positioning within the European compliance market, aiming to win 5k whistleblowing customers and to convert a fifth of these new accounts into customers for the full COCKPIT offering. With the German opportunity now live, this still looks to be achievable and should help to deliver the full-year guidance, albeit weighted to the second half. The medium-term targets (defined as FY26/27e) remain for a 20–25% CAGR in Compliance revenues and 5–10% in Investor Relations, delivering a 30% EBITDA margin, which should be achievable for a platform-based business model.
Net debt at end-Q123 had reduced to €25.99m (end-FY22: €28.43m), including lease liabilities; excluding these, net debt was €22.58m, down from €24.59m. Our forecast for the year-end is for €28.7m (including lease debt) and this may prove to be conservative. The business’s capital requirements are minimal, although ongoing investment in products and services is always needed to maintain market relevance.
Exhibit 2: Financial summary
€'000s |
2020 |
2021 |
2022 |
2023e |
2024e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
|||||||
Revenue |
|
|
37,636 |
50,223 |
61,430 |
71,500 |
88,779 |
Cost of Sales |
0 |
0 |
0 |
0 |
0 |
||
Gross Profit |
37,636 |
50,223 |
61,430 |
71,500 |
88,779 |
||
EBITDA |
|
|
4,760 |
1,742 |
4,567 |
9,100 |
16,165 |
Operating profit (before amort. and excepts.) |
|
|
819 |
(3,975) |
(1,327) |
3,131 |
10,146 |
Amortisation of acquired intangibles |
(656) |
(1,532) |
(2,257) |
(2,257) |
(2,257) |
||
Exceptionals |
0 |
110 |
0 |
0 |
0 |
||
Share-based payments |
0 |
0 |
0 |
0 |
0 |
||
Reported operating profit |
163 |
(5,397) |
(3,584) |
874 |
7,889 |
||
Net Interest |
(396) |
(1,461) |
(1,761) |
(2,578) |
(1,931) |
||
Joint ventures & associates (post tax) |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
1 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
423 |
(5,436) |
(3,087) |
553 |
8,214 |
Profit Before Tax (reported) |
|
|
(233) |
(6,858) |
(5,344) |
(1,704) |
5,957 |
Reported tax |
(599) |
229 |
2,013 |
562 |
(1,966) |
||
Profit After Tax (norm) |
296 |
(5,254) |
(1,924) |
370 |
5,504 |
||
Profit After Tax (reported) |
(832) |
(6,629) |
(3,332) |
(1,142) |
3,991 |
||
Minority interests |
(34) |
0 |
1 |
4 |
0 |
||
Discontinued operations |
0 |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
296 |
(5,254) |
(1,924) |
370 |
5,504 |
||
Net income (reported) |
(866) |
(6,629) |
(3,331) |
(1,137) |
3,991 |
||
Average Number of Shares Outstanding (m) |
7.2 |
8.1 |
9.7 |
10.0 |
10.0 |
||
EPS - normalised (€) |
|
|
0.04 |
(0.65) |
(0.20) |
0.04 |
0.55 |
EPS - normalised fully diluted (c) |
|
|
4.12 |
(64.53) |
(19.76) |
3.70 |
54.90 |
EPS - basic reported (€) |
|
|
(0.12) |
(0.81) |
(0.34) |
(0.11) |
0.40 |
Dividend per share (c) |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
6.4 |
33.4 |
22.3 |
16.4 |
24.2 |
||
EBITDA Margin (%) |
12.6 |
3.5 |
7.4 |
12.7 |
18.2 |
||
Normalised Operating Margin (%) |
2.2 |
(7.9) |
(2.2) |
4.4 |
11.4 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
39,007 |
168,468 |
170,440 |
172,790 |
171,100 |
Intangible Assets |
31,016 |
160,386 |
158,081 |
158,563 |
157,123 |
||
Tangible Assets |
7,216 |
7,351 |
5,011 |
6,878 |
6,628 |
||
Investments & other |
775 |
731 |
7,349 |
7,349 |
7,349 |
||
Current Assets |
|
|
17,086 |
18,369 |
18,932 |
15,269 |
15,595 |
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
3,923 |
7,018 |
6,075 |
7,052 |
8,756 |
||
Cash & cash equivalents |
12,074 |
8,653 |
10,654 |
6,014 |
4,636 |
||
Other |
1,089 |
2,697 |
2,203 |
2,203 |
2,203 |
||
Current Liabilities |
|
|
(12,381) |
(89,171) |
(27,066) |
(30,147) |
(30,790) |
Creditors |
(2,747) |
(3,197) |
(2,709) |
(3,027) |
(3,486) |
||
Tax and social security |
(56) |
(214) |
(1,350) |
(1,571) |
(1,951) |
||
Short term borrowings (includes lease debt) |
(3,278) |
(73,095) |
(8,198) |
(8,198) |
(8,198) |
||
Other |
(6,300) |
(12,665) |
(14,809) |
(17,350) |
(17,155) |
||
Long Term Liabilities |
|
|
(10,768) |
(27,426) |
(50,096) |
(47,096) |
(41,096) |
Long term borrowings (includes lease debt) |
(7,641) |
(9,927) |
(30,890) |
(27,890) |
(21,890) |
||
Other long term liabilities |
(3,127) |
(17,499) |
(19,206) |
(19,206) |
(19,206) |
||
Net Assets |
|
|
32,943 |
70,240 |
112,210 |
110,817 |
114,809 |
Minority interests |
0 |
0 |
1 |
1 |
1 |
||
Shareholders' equity |
|
|
32,943 |
70,240 |
112,210 |
110,818 |
114,809 |
|
|||||||
CASH FLOW |
|||||||
Operating Cash Flow |
3,765 |
(2,296) |
2,786 |
5,065 |
10,248 |
||
Working capital |
1,294 |
(1,149) |
3,952 |
(659) |
(1,246) |
||
Exceptional & other |
1,037 |
5,711 |
699 |
2,069 |
3,951 |
||
Tax |
(154) |
(229) |
(2,013) |
562 |
(1,966) |
||
Net Operating Cash Flow |
|
|
5,942 |
2,037 |
5,425 |
7,038 |
10,988 |
Capex |
(2,008) |
(3,149) |
(2,813) |
(3,250) |
(3,250) |
||
Acquisitions/disposals |
0 |
(96,428) |
(14) |
(968) |
0 |
||
Net interest |
(157) |
(1,636) |
(1,666) |
0 |
0 |
||
Equity financing |
9,124 |
43,929 |
44,833 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
0 |
||
Other |
414 |
(2,772) |
(2,327) |
(3,117) |
(3,117) |
||
Net Cash Flow |
13,315 |
(58,019) |
43,438 |
(297) |
4,621 |
||
Opening net debt/(cash) |
|
|
13,472 |
(1,153) |
74,372 |
28,434 |
28,733 |
FX |
(199) |
126 |
50 |
0 |
0 |
||
Other non-cash movements |
1,509 |
(17,631) |
2,450 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(1,153) |
74,372 |
28,434 |
28,733 |
24,113 |
Source: EQS Group accounts, Edison Investment Research
|
|
Research: Financials
Secure Trust Bank (STB) announced a robust trading update with net lending exceeding £3bn, driven by a 17.7% sequential increase in new business lending. Deposits also significantly increased year-on-year by 16.2%. STB has expanded its capital position through the issuance of £90m tier 2 capital bonds, which is now complete. The augmented capital will provide the bank with growth opportunities in its lending activities. Management states that STB is trading in line with expectations and remains confident in delivering on FY23 and medium-term targets as well as improving its cost income ratio by the end of the year. We maintain our estimates for FY23 and FY24 and highlight that STB should be trading at c 0.45x price-to-book value (P/BV), based on our FY24 estimates, to be fairly valued compared to peers. STB currently trades at a P/BV of 0.31x.