EQS Group — Strong positioning beset by further delays

EQS Group (SCALE: EQS)

Last close As at 23/05/2024

40.80

−0.40 (−0.97%)

Market capitalisation

409m

More on this equity

Research: TMT

EQS Group — Strong positioning beset by further delays

EQS remains in the frustrating position of having a strong commercial proposition in digital whistleblowing still awaiting the impetus of full legislative implementation in its home market of Germany. The timing of this boost remains uncertain, so some caution is built into current year guidance, which is predicated on the law coming into full force in Q323. Financial results will therefore be weighted to H223. The strategy remains sound, in our view, in establishing a much wider pool of customers for cross- and up-selling of other corporate compliance cloud-based services. Upcoming EU regulation on ESG monitoring and reporting should provide substantial further opportunities. Despite the delays, the shares continue to trade well below the level indicated by our DCF.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

EQS Group

Strong positioning beset by further delays

FY22 results

Software

4 April 2023

Price

€22.9

Market cap

€230m

Net debt (€m) at 31 December 2022

28.4

Shares in issue

10.0m

Free float

78.4%

Code

EQS

Primary exchange

XETRA

Secondary exchange

FRA

Share price performance

%

1m

3m

12m

Abs

(1.7)

(3.8)

(29.6)

Rel (local)

(1.7)

(12.4)

(34.8)

52-week high/low

€33.0

€21.3

Business description

EQS Group is a leading international provider of regulatory technology in the fields of corporate compliance and investor relations. Its products enable corporate clients to fulfil complex national and international disclosure obligations, minimise risks and communicate transparently with stakeholders.

Next events

Q1 trading update

15 May 2023

Analyst

Fiona Orford-Williams

+44 (20) 3077 5739

EQS Group is a research client of Edison Investment Research Limited

EQS remains in the frustrating position of having a strong commercial proposition in digital whistleblowing still awaiting the impetus of full legislative implementation in its home market of Germany. The timing of this boost remains uncertain, so some caution is built into current year guidance, which is predicated on the law coming into full force in Q323. Financial results will therefore be weighted to H223. The strategy remains sound, in our view, in establishing a much wider pool of customers for cross- and up-selling of other corporate compliance cloud-based services. Upcoming EU regulation on ESG monitoring and reporting should provide substantial further opportunities. Despite the delays, the shares continue to trade well below the level indicated by our DCF.

Year

end

Revenue
(€m)

EBITDA
(€m)

PBT*
(€m)

EPS*
(€)

EV/EBITDA
(x)

P/E
(x)

12/21

50.2

1.7

(5.4)

(0.65)

148.1

N/A

12/22

61.4

4.6

(3.1)

(0.20)

56.5

N/A

12/23e

71.5

9.1

0.6

0.04

28.4

619.7

12/24e

88.8

16.2

8.2

0.55

16.0

41.7

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Benefits of growth more obvious in FY24e

FY22 results were as outlined in February, with revenue up 22% and EBITDA of €4.6m. We reduced our revenue and EBITDA forecasts at that time and have now made very modest adjustments. Management guidance is for FY23 revenues of €71–74m, with EBITDA of €9–11m, based on management’s assumptions of gaining 2–3k new SaaS customers, from the 1k recruited in FY22 (year-end total of over 5k). On our modelling, this lifts the EBITDA margin from 7.4% in FY22 to 12.7% in FY23. We anticipate further good progress in FY24, with a 24% y-o-y increase in revenues delivering a 78% y-o-y uplift in EBITDA, driven by the increased uptake in the scalable cloud-based Compliance solutions, particularly of EQS’s Compliance COCKPIT. New areas, such as monitoring of supply chain risk, should provide a bridgehead into wider ESG monitoring and reporting solutions.

Leverage comfortable

End FY22 net debt was €28.4m (€24.6m excluding leases), down from €74.4m at end FY21, primarily reflecting the capital raise in the early part of the year and subsequent debt repayment and restructuring. Our modelling suggests a modest uptick in net debt at end FY23 (although the extent will depend on the timing of the expected uplift in demand following the legislation), with the following year seeing a strengthening of the balance sheet. Leverage, in our view, remains comfortable.

Valuation: DCF continues to indicate upside

Given the current low level of profitability, traditional valuation multiples remain unhelpful. We are therefore using a DCF, with a weighted average cost of capital of 9% and terminal growth of 2% (unchanged), which now derives a value of €34.82 per share (February 2023: €32.96), well above the current market price.

Cloud-based products drive the top line

Performance from the Investor Relations segment reflected the challenging capital market environment, itself reflecting the war in Ukraine and the inflationary backdrop. Nevertheless, careful control of costs helped the segment deliver a small profit at the EBITDA level as its sales balance shifted more towards the cloud-based IR COCKPIT. We anticipate that this trend in relative weighting will continue in the current year and in FY24, with the margins benefiting from the leverage of the utilisation of the existing tech stack.

For the Compliance segment, FY22 results include the benefit of earlier acquisitions, particularly Got Ethics, which had a base effect of €6.0m of revenue. The question mark for the FY23 outturn remains over the timing on the impetus from the whistleblowing laws coming into full effect in Germany, but this is clearly the main potential revenue driver across the next 18 months to two years. There are already substantial numbers of new customers coming on board for this in other countries such as France, Italy and Spain, which are further down the track.

Exhibit 1: Summary revenue and forecasts by segment

€000s

FY20

FY21

FY22

FY23e

FY24e

Investor Relations

Cloud-products

7,849

9,504

10,101

11,616

13,068

growth (%)

48%

21%

6%

15%

13%

Service-products

9,818

10,012

9,015

9,465

9,844

growth (%)

13%

2%

-10%

5%

4%

Total Investor Relations

17,667

19,516

19,115

21,081

22,912

growth (%)

10%

10%

-2%

10%

9%

EBITDA

(453)

(1,459)

148

966

1,492

EBITDA margin

(2.6%)

(7.5%)

0.8%

4.6%

6.5%

Compliance

Cloud-products

10,696

19,826

30,340

35,450

48,744

growth (%)

15%

85%

53%

17%

38%

Service-products

9,273

10,881

11,975

14,969

17,123

growth (%)

9%

17%

10%

25%

14%

Total Compliance

19,969

30,707

42,315

50,419

65,867

growth (%)

4%

54%

38%

19%

31%

EBITDA

5,213

3,201

4,419

8,134

14,673

EBITDA margin

26.1%

10.4%

10.4%

16.1%

22.3%

Group Revenue

37,636

50,223

61,430

71,500

88,779

growth

6%

33%

22%

16%

24%

like-for-like growth

18%

14%

9%

Group EBITDA

4,760

1,742

4,567

9,100

16,165

Group EBITDA margin

12.6%

3.5%

7.4%

12.7%

18.2%

Source: EQS Group accounts, Edison Investment Research

As described in our February note, management had previously steered towards a medium-term growth target of €130m of revenues, delivering an EBITDA margin of 30%, which was pencilled in for FY25. This horizon was pushed out 12–18 months (thus now to FY26–27), which remains compatible with our modelling.

Opportunities opening in ESG reporting

On 5 January 2023, the EU Corporate Sustainability Reporting Directive (CSRD) came into force, modernising and strengthening the reporting rules on social and environmental information. The remit is extended to a broader set of approximately 50k large companies, as well as listed SMEs, which are now required to report on sustainability. The new rules will need to be applied by the initial cohort for FY24 (ie reporting in 2025). Companies will need to collect data on environmental impact, diversity and business ethics, as defined in the EU taxonomy for sustainable business activities, and report them in a standardised format, so that they can then be compiled automatically onto a national register.

EQS’s COCKPIT-based solutions to these new reporting requirements are based on the existing tech stack, so the additional investment requirement is limited. Group capital spend is likely to be at a similar level to FY22, although we have built a small contingency into our modelling here.

The whistleblowing opportunity should open up the potential to cross- and up-sell the Compliance COCKPIT. The ESG reporting COCKPIT presents a further opportunity to extend the reach.

Valuation

Given the scale of the transition to take advantage of the whistleblowing opportunity, and the additional costs being borne to achieve it, earnings multiples and comparison to global peers are not particularly helpful at present. For illustrative purposes, we calculate that on FY23 and FY24 EV/sales, the group’s valuation is sitting at around par to global application software peers.

We therefore continue to favour a discounted cash flow (DCF) approach. Using a weighted average cost of capital (WACC) of 9.0% and a terminal growth rate of 2% (unchanged), a DCF generates a share price of €34.82 (up from €32.96 at the time of our February update), 52% above the current level.

Exhibit 2: Valuation at varying WACC and terminal growth rates

Terminal growth rate

€/share

0.00%

1.00%

2.00%

3.00%

4.00%

WACC

11.00%

22.63

23.97

25.61

27.66

30.30

10.50%

24.05

25.59

27.49

29.90

33.05

10.00%

25.62

27.40

29.61

32.47

36.27

9.50%

27.37

29.43

32.04

35.45

40.10

9.00%

29.33

31.73

34.82

38.94

44.71

8.50%

31.54

34.36

38.06

43.09

50.37

8.00%

34.04

37.39

41.85

48.10

57.48

7.50%

36.89

40.90

46.36

54.25

66.65

7.00%

40.18

45.02

51.80

61.97

78.92

6.50%

43.99

49.92

58.48

71.93

96.15

Source: Edison Investment Research

Exhibit 3: 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 (€)

 

 

0.04

(0.65)

(0.20)

0.04

0.55

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)

(2,310)

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

(1,639)

4,621

Opening net debt/(cash)

 

 

13,472

(1,153)

74,372

28,434

30,075

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

30,075

25,455

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by EQS Group and prepared and issued by Edison, in consideration of a fee payable by EQS Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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General disclaimer and copyright

This report has been commissioned by EQS Group and prepared and issued by Edison, in consideration of a fee payable by EQS Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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United Kingdom

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Research: Healthcare

OpGen — Interim milestone achieved for R&D collaboration

OpGen has announced the achievement of two interim milestones as part of its research project (PREPLEX) in collaboration with InfectoGnostics (a research campus for diagnosis of infectious diseases and pathogens) under Jena University, Germany. The initial joint R&D project, announced in September 2020, aims to develop AI-based assay for phenotypic carbapenemase resistance in Gram-negative bacteria. Completion of the interim milestones is related to the identification of novel markers for phenotypic carbapenemase resistance in Klebsiella pneumoniae and Pseudomonas aeruginosa (two pathogens on the World Health Organization’s list of concern), which was further validated by the OpGen’s ARESdb database. This encouraging development presents the opportunity for a potential expansion of the project. Given the company’s current focus on building AI models to predict antibiotic susceptibility, we believe this development provides further momentum to OpGen’s plans.

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Laboratory Opgen

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