EQS Group — Top-line growth offset by higher investment

EQS Group (SCALE: EQS)

Last close As at 02/03/2024

EUR39.80

0.00 (0.00%)

Market capitalisation

EUR399m

More on this equity

Research: TMT

EQS Group — Top-line growth offset by higher investment

EQS’s first half results show good revenue growth in its domestic market, boosted by the consolidation of ARIVA (67.5% owned). The build-up of business in new markets is starting to register, with Asia now breaking even. The costs of this expansion and investment in a number of new products and services is constraining operating profits, which were marginally (3%) below the comparative period. The group remains well positioned to benefit from trends in digitisation and globalisation and the growing complexity of corporate compliance requirements.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

EQS Group

Top-line growth offset by higher investment

Software

Scale research report - Update

15 August 2017

Price

€55.84

Market cap

€73m

Share price graph

Share details

Code

EQS

Listing

Deutsche Börse Scale

Shares in issue

1.31m

Last reported net debt as at 30 June 2017

€6.3m

Business description

The EQS Group is a leading international technology provider for digital investor relations, corporate communications and compliance. With more than 8,000 client companies worldwide, its products and services are designed to fulfil complex national and international information obligations to the global investment community.

Bull

Financial market regulation.

Growing global network.

High percentage of recurring and repeatable income.

Bear

Intense competition in the US and UK.

Remains in investment phase.

EBIT margin yet to trend up.

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Bridie Barrett

+44 (0)20 3077 5757

Edison profile page

EQS’s first half results show good revenue growth in its domestic market, boosted by the consolidation of ARIVA (67.5% owned). The build-up of business in new markets is starting to register, with Asia now breaking even. The costs of this expansion and investment in a number of new products and services is constraining operating profits, which were marginally (3%) below the comparative period. The group remains well positioned to benefit from trends in digitisation and globalisation and the growing complexity of corporate compliance requirements.

Strong sales momentum

Good top-line progress, particularly in Germany, was both at an organic level (revenues up 11%) and from the consolidation of ARIVA. The upcoming PRIIP regulation implementation is stimulating demand for workflow solutions, while the Market Abuse Regulations are increasing the volume of corporate announcements. Good increases across all the Products & Services were achieved, including a recovery in Media revenues after a weak Q1. The regulatory requirements on companies both within the EU and in other markets constantly increase in number and complexity, giving a strong trading backdrop for EQS’s offering.

Investment in growth

With a substantial step up in employee numbers from ARIVA and continuing high levels of product development (including investment in COCKPIT capabilities), as well as the expansion into new markets, costs have continued to run at high levels. The reported adjusted EBIT number for H117 was 3% down on H116. Full year guidance is unchanged: revenues to be ahead by 20-25% and non-IFRS EBIT to grow by 10-20%. The medium-term outlook is for non-IFRS EBIT to grow by 20-25% over 2017-21, on a top line increasing by 10-15%, implying a good pick-up in margins as the group moves from an investment to a growth phase.

Valuation: Development risk discount overstated

EQS remains in its investment/growth phase, so comparisons with large global financial information companies are inevitably distorted. Using blended historical and forward multiples to revenue and EBITDA, it is clear that, although the shares have increased by over 50% over the last year, EQS still trades at a discount to peers of over 22%. We believe this overstates the development risk and expect the discount to close as EQS’s international expansion drives an attractive ROI.

Consensus estimates

Year
end

Revenue
(€m)

Adjusted PBT
(€m)

EPS

(€)

DPS
(€)

P/E

(x)

Yield
(%)

12/15

18.4

2.5

1.20

0.75

46.5

1.3

12/16

26.1

1.8

0.96

0.75

58.2

1.3

12/17e

32.3

3.0

1.19

0.75

46.9

1.3

12/18e

36.3

3.7

1.61

0.81

34.7

1.5

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

This commentary is based on the published results and the consensus forecasts as published on Bloomberg.

Exhibit 1: Half year to 30 June 2017 vs prior half year

€000s

H117

H116

% change

Revenue

15,014

10,377

+45

Non-IFRS EBIT

912

942

-3%

Non-IFRS EBIT margin (%)

6.1

9.1

Profit before tax (as reported)

66

399

-83

Net income (as reported)

(176)

103

N/A

Source: EQS accounts

For the full year FY17, company guidance is for non-IFRS EBIT to fall in the range of €3.6-3.9m, on revenues of €31.2m to €32.5m. This implies H217 revenues a little ahead of H117 but at a considerably healthier margin (in the high teens).

At the EBT level, H117 financial performance was affected by exchange rate movements between the euro and the group’s other operating currencies. Net financial charges increased from €263k to €497k, but the majority of this represented non-cash movements.

Increased working capital requirements and the investment programme referred to above (net investment spend was €3.6m in the half year) led to net debt at the end of June rising to €6.3m from €2.6m at the previous year end balance sheet.

Valuation

Peer valuation

We have looked at the valuation of EQS in comparison to three peer categories: global technology software companies in business services (principally US based); business-to-business media companies, principally based in Europe; and financial publishing companies (Thomson Reuters, Envestnet, Morningstar, and Dun and Bradstreet, with the addition of FactSet).

Exhibit 2: Comparison of valuation between EQS and global quoted peers

Aggregate market cap (US$)

TTM EBITDA margin

TTM Rev growth

EV/TTM rev (x)

EV/TTM

EBITDA (x)

Forward EV/rev

Forward EV/EBITDA

Business intelligence

2,710

13.6%

13.5%

3.0

12.2

2.8

12.0

Financial & accounting

3,329

24.6%

5.0%

3.7

16.4

3.5

16.0

Vertical – finance

6,669

34.5%

8.5%

4.4

14.0

4.2

13.6

Weighted software companies

12,708

26.2%

7.9%

3.9

14.5

4.2

13.1

B2B media businesses

60,864

18.3%

11.7%

4.4

3.6

13.8

Financial publishing companies

48,966

24.9%

10.2%

4.1

14.2

3.8

13.9

EQS

14.7%

55.4%

2.6

17.6

2.3

15.1

Discount to software comparatives (on average of relevant multiples)

21.8%

Discount to B2B media stocks (on average of relevant multiples)

42.2%

Discount to financial publishing stocks (on average of relevant multiples)

25.0%

Source: Bloomberg, Software Equity Group, Edison Investment Research. Note: TTM = trailing 12 months. Prices as at 14 August 2017.

The market valuations of the three subsectors that we have looked at are now all broadly aligned.

All three groups, though, are trading at higher sales multiples than EQS, although its business model has elements common to all of them, particularly in communications and delivery mechanisms.

Obviously, EQS is less well known than the companies we are comparing it to, particularly outside its original home markets of Germany, Austria and Switzerland, with a shorter record of delivering against objectives. With less liquidity in its shares, applying a meaningful valuation discount is sensible. As shown above, when compared to average multiples of historical and prospective EV/revenue and EV/EBITDA, EQS currently trades on a 22% discount to relevant software and 25% to financial publishing stocks, and on a substantial 42% discount to B2B media stocks (dominated by the large exhibition companies).

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United Kingdom

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