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Research: TMT
EQS is investing to take advantage of the opportunity it has to build a far larger enterprise and broaden its client base. The market for cloud-based tech systems to log and control aspects of corporate governance, risk and compliance is attractive and sits comfortably alongside its existing offerings in digital investor relations. The pursuit of this adapted goal, becoming a global tech B2B provider with high levels of recurring income, is costing the group short-term profitability, but the potential rewards are substantial. The share price has performed well over the last year and, if management can deliver on its plan, further upside should result.
EQS Group |
Grasping the greater opportunity
Software |
Scale research report - Update
17 April 2018 |
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EQS is investing to take advantage of the opportunity it has to build a far larger enterprise and broaden its client base. The market for cloud-based tech systems to log and control aspects of corporate governance, risk and compliance is attractive and sits comfortably alongside its existing offerings in digital investor relations. The pursuit of this adapted goal, becoming a global tech B2B provider with high levels of recurring income, is costing the group short-term profitability, but the potential rewards are substantial. The share price has performed well over the last year and, if management can deliver on its plan, further upside should result.
FY17 and FY18 peak investment years
In September 2017, EQS management indicated increasing investment to take advantage of new opportunities to develop and market adjacent products and services. By the time of the year-end update in February 2018, the expected extra spend had grown and guidance for FY17 adjusted EBIT reduced from €2.0-2.3m to €1.3-1.5m. The delivered figure of €1.1m reflects FY17 investment of €2.1m, mostly in personnel and freelancers to enhance its cloud-based offering, plus €0.4m on international growth. The project has highlighted further options for attractive commercial enhancements. FY18 is now therefore also to be an investment year, towards a larger and more profitable long-term goal. Management indicates a top-line CAGR of 17% through to FY25e.
Market fundamentals remain attractive
Ever-increasing corporate regulation and rising penalties for failure to adhere to the rules provide a robust backdrop for EQS to increase the range of its provision. It has established a high level of trust with its IR customers that puts it in pole position to cross-sell other governance services and build the recurring revenue base.
Valuation: Revisiting development stage
At this point last year, EQS was set to be moving on from its development phase, growing its top line and EBITDA, making earnings’-based peer comparisons a sensible approach. The curtailment of earnings by the investment now makes the shares difficult to value against peers (trading on FY18e 18.1x EV/EBITDA and 28.1x P/E). Despite a shifting short-term outlook, the share price has performed well and is 44% ahead year-on-year. If management delivers the indicated revenue growth and improves margins, there is good potential for further appreciation.
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Consensus estimates
Source: Bloomberg |
Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.
Financials
Exhibit 1: Divisional development FY17
Regulatory Information & News |
% y-o-y |
Products & Services |
% y-o-y |
|
Revenue (€m) |
11.62 |
18% |
19.17 |
15% |
EBITDA (€m) |
1.62 |
-22% |
0.73 |
-63% |
EBITDA margin |
13.9% |
3.8% |
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Adj EBIT (€m) |
1.17 |
-25% |
-0.06 |
N/A |
Adj EBIT margin |
10.1% |
-0.3% |
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Capitalised development costs (€m) |
2.03 |
0.34 |
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Forecast revenue growth FY18 |
35% - 40% |
10% - 15% |
Source: Company accounts
The impact of the investment on the financial outcome is clear from the table above. Guidance on revenue is given at a group level as well as the divisional, with a range of €36.0m to €37.6m for the group for FY18e. In the presentation materials, management has also provided its view on the potential for mid-term growth, outlining top-line CAGR of 17% through to FY25.
Historically, management has guided to an adjusted (non-IFRS) EBIT, but this is now being changed to an indication of the level of EBITDA. For FY18, this is given at €1.5-2.1m for the group, from €2.35m in FY17. The additional investment has been (and will continue to be) in staff and freelance personnel, primarily developers. Personnel costs were up 32% to €17.0m in FY17, with services’ costs (freelancers) +38% to €5.7m. Other operating expenses were also markedly increased, up 40% to €8.0m, with the higher sums also associated with the investment programme.
Exhibit 2: Mid-term guidance for revenues
€m |
FY18e |
FY25e |
FY18-25e CAGR |
Group |
36.8 |
110 |
17% |
Governance & Compliance |
19.1 |
70.4 |
20% |
Investor Relations |
17.7 |
39.6 |
12% |
Source: Company presentation
Mid-term guidance is split between Investor Relations and Governance & Compliance, implying that management is looking at presenting the divisional split in a different (and more helpful) way in the future. It also clearly shows the attractive potential from expansion in the provision of digital services in governance, risk and compliance.
EQS raised €7.9m in a share placing in mid-December 2017, at €62.50, primarily to fund the purchase of Integrity Line in Switzerland. At the year-end, net debt stood at €3.6m. Given the ongoing investment, this is likely to increase by end FY18, before starting to drop back as margins start to build, with reducing freelancer costs and increased overheads recovery as the top line grows. Reinstatement of the dividend is not anticipated before FY19.
Valuation
Given the suppression of earnings, any peer-based comparisons need to be more forward-looking than normal, so are inevitably going to be more error-prone and of limited value. Global fintech peers are trading on FY18e 18.1x EV/EBITDA and 28.1x P/E but, given the circumstances, comparison on this basis is not meaningful. The same fintech peer group is trading on 4.4x EV/ FY18 revenues, and this would imply a valuation per share for EQS of €105 on consensus forecasts. Some element of discount is then needed to reflect the execution risk. 15% would shift the implied valuation to €89.
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Arena Events is excitingly poised to use its IPO enhanced strength (FY17 net debt/EBITDA of just 1.1x) to accelerate a well-defined, proven strategy. International replication of its successful integrated UK model is likely to be a prime move, facilitated by prestigious reference customers and highly fragmented markets. Meanwhile trading continues to be encouraging with 2017 adj. EBITDA up 25% and a ‘healthy’ Q1, bolstered by two acquisitions and the promise of more. Valuation appears undemanding (6x 2018e EV/EBITDA), while a progressive dividend policy offers almost 4% yield.