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Q3 figures were consistent with the previous indications during this year of peak investment in the €9m programme to build a global regulatory tech platform business. FY18e guidance, however, has been tightened to the lower end of the range and we have reined in our FY19e and FY20e revenue and EBITDA forecasts. FY20e still shows a strong increase in return on sales, with EBITDA margin rising to 12%. EQS is building an attractive recurring revenue base (81% of total sales in Q318). It has its eyes firmly on the prize of being an integral part of companies’ corporate compliance and investor relations functions across the globe.
EQS Group |
Continuing investment |
Q3 results |
Software & comp services |
20 November 2018 |
Share price performance
Business description
Next events
Analysts
EQS Group is a research client of Edison Investment Research Limited |
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Q3 figures were consistent with the previous indications during this year of peak investment in the €9m programme to build a global regulatory tech platform business. FY18e guidance, however, has been tightened to the lower end of the range and we have reined in our FY19e and FY20e revenue and EBITDA forecasts. FY20e still shows a strong increase in return on sales, with EBITDA margin rising to 12%. EQS is building an attractive recurring revenue base (81% of total sales in Q318). It has its eyes firmly on the prize of being an integral part of companies’ corporate compliance and investor relations functions across the globe.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS |
P/E |
EV/EBITDA (x) |
Yield |
12/16 |
26.1 |
2.4 |
0.96 |
0.75 |
74.4 |
32.8 |
1.0 |
12/17 |
30.4 |
0.8 |
0.16 |
0.00 |
N/A |
45.9 |
N/A |
12/18e |
36.0 |
(0.1) |
(0.93) |
0.00 |
N/A |
216.2 |
N/A |
12/19e |
42.0 |
0.1 |
0.04 |
0.00 |
N/A |
56.0 |
N/A |
12/20e |
50.3 |
4.0 |
1.58 |
0.35 |
45.3 |
22.0 |
0.5 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Compliance drives top-line growth
Year-to-date compliance revenues were ahead by 41%, at 48% of total group and firmly positioning EQS in this higher-growth segment of the market. FY18 will have been the main transition year as the group’s offering has broadened with internally developed tools and services, supplemented with small acquisitions. The new COCKPIT cloud platform is set to launch imminently and should facilitate cross-selling of additional services, driving the top line through FY19e and FY20e.
Changes to revenue, EBITDA estimates
A nine-month figure of €25.9m implies Q318 revenues of €8.8m, up 25% over the prior year (including €0.3m from Integrity Line, bought in December 2017). Our revised FY18 estimate of €36.0m (was €36.5m), suggests Q4 revenue of €10.0m and a Q418 EBITDA of €1.2m, making the group EBITDA profitable for the year. We have trimmed out FY19e revenue estimate by 3% to €42.0m. The group’s cost base is unlikely to change in the short term, bar some shift from contract to permanent with the software development centre in Munich. As the recovery in profitability is more likely to be H2 weighted, we have taken a more cautious stance and reduced our EBITDA estimate from €3.7m to €2.1m. FY20e should see the full-year benefit of the reoriented business model and our provisional revenue and EBITDA estimates are adjusted by less than 10%.
Valuation: Underpinned at these levels
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 currently valued on 4.7x FY18e, against EQS on 3.0x, a 36% discount. A reverse DCF suggests that an EBITDA margin of c 15% (beyond our explicit 2018–20 forecast period) is required to arrive at the current share price of €72, implying the current price is well underpinned.
Moving through peak investment
Q3 sound progress
Exhibit 1: FY18 quarterly trends to date
Large-cap German clients |
Q118 |
Q218 |
Q318 |
Recurring revenues |
76% |
86% |
85% |
New customers |
12 |
34 |
30 |
Total number of customers |
1,081 |
1,115 |
1,143 |
Qly rev per customer (€) |
3,300 |
3,100 |
2,850 |
Customer acquisition cost (€) |
4,200 |
4,200 |
4,500 |
Ann Churn rate |
<5% |
0% |
0.2% |
Source: Company presentation
Full descriptions of the business activities were laid out in our August Outlook, published after the interims. The group continued to pick up customers in Q3 and the churn rate remains encouragingly low. In terms of product performance, the issuance of Legal Entity Identifiers continues to be robust, with 4,6k issued in the quarter, taking the total to 19,8k. Q318 XML revenues were €4.25m, also showing good progress. Insider Manager has continued to make good progress, but the sales cycle for Integrity Manager outside its home territory of Switzerland is proving longer than had been hoped.
On the IR side of the business, News and Regulatory newsflow revenues have been reasonably robust, reflecting the volatility in underlying markets.
Impact on figures
Our revenue and EBITDA figures have been revised as outlined above. At the pre-tax level, there is a more substantive change in ‘other financial income’. This is due to the reclassification of the group’s shareholding in Issuer Direct, which is now reflected ‘at fair value through profit or loss’. Combined with the share price increase in the first nine months of the year, other financial income for the nine months was €1.13m, compared with a loss of €680k in the comparative period.
Exhibit 2: Summary forecast changes
EBITDA (€m) |
PBT (€m) |
EPS (c) |
|||||||
Old |
New |
% chg. |
Old |
New |
% chg. |
Old |
New |
% chg. |
|
2018e |
0.7 |
0.5 |
-29 |
(1.2) |
(0.1) |
N/A |
(157) |
(93) |
N/A |
2019e |
3.7 |
2.1 |
-43 |
1.7 |
0.1 |
-94 |
67 |
4 |
-94 |
2020e |
6.4 |
6.0 |
-6 |
4.4 |
4.0 |
-9 |
153 |
158 |
+3 |
Source: Edison Investment Research
Implications for valuation
The value in EQS’s equity reflects the opportunity being developed for the medium and longer term rather than the immediate financial returns, so these reductions in short-term forecasts do not have significant ramifications. With the current investment phase heavily weighing on earnings, there is no particular conclusion to be drawn from earnings-based comparisons. On EV/sales, EQS is at 3.0x FY18e revenues, compared to the global financial platform peers on 4.7x (listed in our Outlook note), but it should be borne in mind that they are larger and more mature businesses. As previously, we have used a reverse DCF, based on a WACC of 8% and a terminal growth rate of 2%. Assuming the group’s indicated medium-term revenue CAGR guidance of around 17%, it suggests that an EBITDA margin of c 15% (beyond our explicit 2018–20 forecast period) is required to arrive at the current share price of €72, making it look well supported, in our view.
Exhibit 3: Financial summary
€'000s |
2016 |
2017 |
2018e |
2019e |
2020e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
26,061 |
30,355 |
36,000 |
42,000 |
50,250 |
Cost of Sales |
0 |
0 |
0 |
0 |
0 |
||
Gross Profit |
26,061 |
30,355 |
36,000 |
42,000 |
50,250 |
||
EBITDA |
|
|
4,175 |
2,349 |
500 |
2,100 |
6,030 |
Operating Profit (before amort. and except.) |
3,282 |
1,077 |
(1,100) |
475 |
4,405 |
||
Intangible Amortisation |
(619) |
(732) |
(750) |
(775) |
(775) |
||
Exceptionals |
0 |
0 |
0 |
0 |
0 |
||
Other |
(874) |
(146) |
1,195 |
(150) |
(150) |
||
Operating Profit |
1,788 |
199 |
(655) |
(450) |
3,480 |
||
Net Interest |
(14) |
(139) |
(190) |
(225) |
(225) |
||
Profit Before Tax (norm) |
|
|
2,393 |
792 |
(95) |
100 |
4,030 |
Profit Before Tax (FRS 3) |
|
|
1,774 |
60 |
(845) |
(675) |
3,255 |
Tax |
(960) |
(634) |
(1,050) |
(38) |
(1,511) |
||
Profit After Tax (norm) |
1,144 |
215 |
(1,331) |
56 |
2,267 |
||
Profit After Tax (FRS 3) |
814 |
(574) |
(1,895) |
(712) |
1,744 |
||
Average Number of Shares Outstanding (m) |
1.19 |
1.31 |
1.43 |
1.43 |
1.43 |
||
EPS - normalised (c) |
|
|
96.1 |
16.4 |
(92.7) |
3.9 |
158.0 |
EPS - (IFRS) (c) |
|
|
43.2 |
(39.3) |
(145.0) |
(50.1) |
104.0 |
Dividend per share (c) |
75.0 |
0.0 |
0.0 |
0.0 |
35.0 |
||
EBITDA Margin (%) |
16.0 |
7.7 |
1.4 |
5.0 |
12.0 |
||
Operating Margin (before GW and except.) (%) |
12.6 |
3.5 |
-3.1 |
1.1 |
8.8 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
30,389 |
34,914 |
41,020 |
47,421 |
50,166 |
Intangible Assets |
26,314 |
26,662 |
34,368 |
39,569 |
41,619 |
||
Tangible Assets |
4,075 |
8,251 |
6,651 |
7,851 |
8,546 |
||
Investments |
0 |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
12,014 |
12,536 |
8,997 |
9,710 |
11,339 |
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
4,562 |
5,053 |
5,873 |
6,851 |
8,033 |
||
Cash |
6,610 |
6,374 |
2,016 |
1,750 |
2,197 |
||
Other |
842 |
1,108 |
1,108 |
1,108 |
1,108 |
||
Current Liabilities |
|
|
(9,942) |
(11,559) |
(15,986) |
(17,731) |
(17,232) |
Creditors |
(5,853) |
(5,574) |
(6,736) |
(8,231) |
(10,082) |
||
Short term borrowings |
(4,089) |
(5,986) |
(9,250) |
(9,500) |
(7,150) |
||
Long Term Liabilities |
|
|
(7,237) |
(6,526) |
(10,081) |
(10,831) |
(10,581) |
Long term borrowings |
(4,761) |
(3,946) |
(7,500) |
(8,250) |
(8,000) |
||
Other long term liabilities |
(2,476) |
(2,581) |
(2,581) |
(2,581) |
(2,581) |
||
Net Assets |
|
|
25,224 |
29,363 |
23,950 |
28,568 |
33,691 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
3,827 |
1,850 |
840 |
2,500 |
6,500 |
Net Interest |
(13) |
35 |
(190) |
(225) |
(225) |
||
Tax |
(341) |
(238) |
(738) |
(797) |
(406) |
||
Capex |
891 |
(4,456) |
(5,976) |
(2,825) |
(2,320) |
||
Acquisitions/disposals |
(3,731) |
(3,148) |
(5,035) |
0 |
0 |
||
Equity Financing |
2,601 |
6,965 |
0 |
0 |
0 |
||
Dividends |
(877) |
(1,939) |
0 |
0 |
(502) |
||
Net Cash Flow |
2,357 |
(931) |
(11,099) |
(1,347) |
3,047 |
||
Opening net debt/(cash) |
|
|
4,716 |
2,240 |
3,557 |
14,734 |
16,000 |
HP finance leases initiated |
104 |
0 |
(78) |
0 |
0 |
||
Other |
15 |
(386) |
0 |
81 |
0 |
||
Closing net debt/(cash) |
|
|
2,240 |
3,557 |
14,734 |
16,000 |
12,953 |
Source: Company accounts, Edison Investment Research
|
|
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