EQS Group — Whistleblowing increasing in volume

EQS Group (SCALE: EQS)

Last close As at 21/05/2024

40.80

−0.40 (−0.97%)

Market capitalisation

409m

More on this equity

Research: TMT

EQS Group — Whistleblowing increasing in volume

EQS Group continues to increase in scale and ambition, extending its remit into sustainability technology alongside its existing cloud-based offerings in corporate governance and investor relations. The recent capital raise of €45m gross at €33.00 per share puts the group on a more solid financial footing as it pursues the major opportunity in whistleblowing solutions and gives Gerlin NV a 6.2% stake. Management has reiterated its medium-term target for FY25 of group revenues of €130m and EBITDA margins of at least 30%. Our forecasts indicate that this is demanding but achievable.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

EQS Group

Whistleblowing increasing in volume

FY21 results

Software & comp services

12 April 2022

Price

€32.90

Market cap

€322m

Pro forma net debt (€m) at 31 March 2022

29.5

Shares in issue

9.8m

Free float

23.6

Code

E1SX

Primary exchange

XETRA

Secondary exchange

FRA

Share price performance

%

1m

3m

12m

Abs

2.8

(20.5)

0.9

Rel (local)

(1.3)

(10.7)

8.3

52-week high/low

€47.00

€30.00

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 figures

13 May 2022

H1 figures

8 August 2022

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Max Hayes

+44 (0)20 3077 5700

EQS Group is a research client of Edison Investment Research Limited

EQS Group continues to increase in scale and ambition, extending its remit into sustainability technology alongside its existing cloud-based offerings in corporate governance and investor relations. The recent capital raise of €45m gross at €33.00 per share puts the group on a more solid financial footing as it pursues the major opportunity in whistleblowing solutions and gives Gerlin NV a 6.2% stake. Management has reiterated its medium-term target for FY25 of group revenues of €130m and EBITDA margins of at least 30%. Our forecasts indicate that this is demanding but achievable.

Year end

Revenue (€m)

EBITDA
(€m)

PBT*
(€m)

EPS*
(c)

EV/EBITDA
(x)

P/E
(x)

12/20

37.6

4.8

0.4

4.1

74.2

799.1

12/21

50.2

1.7

(5.9)

(69.8)

202.7

N/A

12/22e

70.0

7.5

(0.0)

(0.3)

47.1

N/A

12/23e

90.0

18.0

10.5

69.4

19.6

47.4

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

FY21: Strong compliance growth and investment

As indicated in our January Flash note, EQS had a strong Q421, with revenues in the quarter up 48% on the prior year. The customer base grew by 423, taking the total number of new SaaS customers for the year to 1,017, despite delays to the enactment of whistleblowing legislation across the EU. Annual recurring revenues continue to grow as a proportion of the whole, at 85% from 78%. The decline in reported EBITDA from the prior year was well signalled and reflects the additional investment made in gearing up the sales effort ahead of the tightened framework for protection of whistle-blowers of €4.77m, as well as a purchase price adjustment of €0.35m. Management guidance for FY22 is maintained at revenue of €65–75m, delivering EBITDA in a range of €6–10m. Our forecasts are within this range and our new FY23 numbers demonstrate further progress towards management’s FY25 ambition of €130m of revenue and an EBITDA margin of over 30%.

Sustainability reporting next opportunity

The EU Corporate Sustainability Reporting Directive (CSRD) applies from January 2024 for FY23 figures for companies with at least 250 employees, clearly overlapping with EQS’s existing target customer base. The intended acquisition of DFGE, announced in February, gives a head start here. EQS raised €43.7m gross in three FY21 fund-raises (February, June and December) and recently completed a further €45m raise, the largest in the group’s history. The proceeds reduced pro forma net debt to €29.5m at end March and give additional resource to develop the offering in sustainability reporting. The new shares are set to trade from 30 April.

Valuation: DCF indicates meaningful upside

Profitability is currently subdued by the additional investment phase, so traditional valuation multiples remain of limited use. A DCF, using a WACC of 8% and terminal growth of 2%, indicates a value of €57.93/share, boosted from our November figure of €47.19 by subsequent balance sheet strengthening and the roll forward of year.

Cloud-based products driving the top line

The year-end trading update in January indicated the level of revenue for FY21, but not the EBITDA. As well as the published EBITDA figure of €1.7m, management also disclosed a ‘clean’ figure, stripping out the additional spend on tackling the short-term opportunity for expansion around whistleblowing (€4.8m) and the €0.4m purchase price adjustment. This is €6.9m, giving an adjusted EBITDA margin of 13.7%, up from 12.6% in FY20.

Organic revenue growth for the year was 14%, with the acquisitions (principally Business Keeper) boosting overall revenues by 33%. As shown below, the key growth driver was the cloud-based Compliance products segment as the acquisitions started to contribute.

Exhibit 1: Summary revenue and forecasts by segment

€000s

FY19

FY20

FY21

FY22e

FY23e

Investor Relations

Cloud-products

5,286

7,849

9,504

11,642

13,680

growth (%)

0%

48%

21%

23%

18%

Service-products

8,717

9,818

10,012

10,513

11,038

growth (%)

0%

13%

2%

5%

5%

Discontinued operation (ARIVA.DE)

2,072

0

0

0

0

Total Investor Relations

16,075

17,667

19,516

22,155

24,718

growth (%)

10%

10%

14%

12%

like-for-like growth (%)

26%

Compliance

Cloud-products

9,332

10,696

19,826

34,244

48,280

growth (%)

0%

15%

85%

73%

41%

Service-products

8,535

9,273

10,881

13,601

17,002

growth (%)

0%

9%

17%

25%

25%

Discontinued operation (ARIVA.DE)

1,425

0

0

0

0

Total Compliance

19,292

19,969

30,707

47,845

65,282

growth (%)

4%

54%

56%

36%

like-for-like growth (%)

12%

Group

35,367

37,636

50,223

70,000

90,000

growth

6%

33%

39%

29%

like-for-like growth

18%

14%

Source: Company accounts, Edison Investment Research

Key focus on whistleblowing continues into FY22

The group’s digital whistleblowing solutions have been sold into some good new accounts, including Arla, Lufthansa, TeamViewer, Deutsche Post, Tat Stell and Revolut. The new national laws legislating for the EU Whistleblower Directive have come into effect in France, with companies required to comply by September. Implementation in Germany, which is key to EQS’s operations, was delayed by an administrative backlog due to the change of government but is expected to come into force around mid-year.

The experience the group is accumulating from earlier enactment in France and Denmark is useful in preparing for the opportunity in the larger German market. The year has started well, with 35 new whistleblowing customers added in January and 43 in February.

New opportunity opening in ESG reporting

The EU CSRD is expected to be introduced in FY23 (earliest) and will apply to corporates with over 250 employees, potentially bringing around 50,000 companies under the remit.

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, which will mean they can be compiled automatically onto a national register. EQS is already offering solutions across the social and governance sphere and the recent proposed acquisition of DFGE (letter of intent signed in February 2022) will give the group a major step up in expertise and experience in the environmental field.

Work has already commenced on building a software solution that can form the base of a new section of the group’s COCKPIT platform, alongside Compliance and Investor Relations.

Placing strengthens balance sheet

The group raised €43.7m in three smaller fund-raisings across FY21 and, in February 2022, these were followed by a larger placing to raise €45m gross. To satisfy the appetite of a new cornerstone investor, Gerlin NV’s Teslin fund, the deal was structured to be underwritten by other key investors, which only subscribed to the extent that, with a rump placing, they would end up where they wanted to be, thereby avoiding dilution. So, although visually, a take up of 9.7% looks poor, this does not represent the underlying degree of support from existing shareholders. Gerlin took 42% of the issue and now has a 6.2% in the enlarged equity.

The other advantage of the transaction was that it did not require the major input of investment bankers, saving 2–3m on the deal.

The proceeds are being applied to the repayment of bridging finance (ie a €50m loan from Commerzbank with a 12-month term from June 2021), with a refinancing underway that will provide a more suitable financial structure for an acquisitive, growth company.

This is particularly important to get right if management is to capitalise on the further opportunity in ESG cloud-based products for the corporate market.

New FY23 forecasts show stronger margin growth

Our current year forecasts for revenue and EBITDA are unchanged and are inside management’s guided range of €65–75m for the former and €6–10m for the latter, at €70m and €7.5m respectively. There remains uncertainty over the likely H1:H2 mix, given the delays to the implementation of the legislation in Germany. The experience in Denmark was that there was a substantial uptick in demand in the three months before the law came into force – a pattern likely to be replicated in Germany.

Our new FY23 forecasts show the benefit of the higher revenues starting to drop through more effectively to EBITDA as expenses rise at a slower rate. Under our modelled scenario, EBITDA margin rises from 10.7% in FY22 to 20.0% in FY23. Management’s medium-term targets are for revenues of €130m and EBITDA margins of 30% for FY25, which appears to us to be demanding but achievable.

Our modelling of the balance sheet now includes the placing proceeds.

Valuation

In common with many other technology-focused stocks globally, EQS’s share price retrenched over the first few weeks of the year, before settling at a lower level from late February, with the current share price 28% below that at the end of FY21.

Given the scale of the transition, and the additional costs being borne to achieve it, earnings multiples and comparison to global peers is not particularly helpful at present. For illustrative purposes, we calculate that on FY23 EV/sales, the group sits at a 56% discount to the larger global financial software companies and at a 26% discount to global application software peers.

We therefore continue to favour a DCF approach. Using a WACC of 8.0% and a terminal growth rate of 2%, with the medium-term forecasts set to match management’s published plan for FY25 (revenues of €130m and an EBITDA margin of 30%), a DCF generates a share price of €57.93 (up from €47.19 at the time of our November Update, reflecting the subsequent fund-raises and the rolling forward of the year), 79% above the current level.

Exhibit 2: Financial summary at varying WACC and terminal growth rates

Terminal growth rate

0.00%

1.00%

2.00%

3.00%

4.00%

WACC

10.00%

34.68

37.09

40.10

43.97

49.13

9.50%

37.27

40.07

43.63

48.28

54.61

9.00%

40.17

43.46

47.69

53.33

61.22

8.50%

43.43

47.32

52.40

59.33

69.34

8.00%

47.14

51.76

57.93

66.57

79.53

7.50%

51.37

56.93

64.51

75.46

92.67

7.00%

56.23

62.99

72.44

86.63

110.27

6.50%

61.89

70.20

82.19

101.04

134.97

6.00%

68.54

78.90

94.44

120.34

172.14

5.50%

76.45

89.60

110.27

147.46

234.24

Source: Edison Investment Research

Exhibit 3: Financial summary

€'k

2019

2020

2021

2022e

2023e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

35,367

37,636

50,223

70,000

90,000

Cost of Sales

0

0

0

0

0

Gross Profit

35,367

37,636

50,223

70,000

90,000

EBITDA

 

 

2,554

4,760

1,742

7,500

18,000

Operating Profit (before amort. and excepts.)

 

 

(2,433)

819

(4,417)

1,517

12,018

Amortisation of acquired intangibles

(743)

(656)

(1,090)

(1,150)

(1,149)

Exceptionals

0

0

110

0

0

Share-based payments

0

0

0

0

0

Reported operating profit

(3,176)

163

(5,397)

367

10,869

Net Interest

2,093

(396)

(1,461)

(1,556)

(1,512)

Joint ventures & associates (post tax)

0

0

0

0

0

Exceptionals

0

0

0

0

0

Profit Before Tax (norm)

 

 

(340)

423

(5,878)

(39)

10,506

Profit Before Tax (reported)

 

 

(1,083)

(233)

(6,858)

(1,189)

9,357

Reported tax

(610)

(599)

229

416

(3,275)

Profit After Tax (norm)

(532)

296

(5,682)

(25)

6,829

Profit After Tax (reported)

(1,693)

(832)

(6,629)

(773)

6,082

Minority interests

121

(34)

0

0

0

Discontinued operations

0

0

0

0

0

Net income (normalised)

(532)

296

(5,682)

(25)

6,829

Net income (reported)

(1,572)

(866)

(6,629)

(773)

6,082

Average Number of Shares Outstanding (m)

7.2

7.2

8.1

9.5

9.8

EPS - normalised (€)

 

 

(0.07)

0.04

(0.70)

(0.00)

0.69

EPS - normalised fully diluted (€)

 

 

(0.07)

0.04

(0.70)

(0.00)

0.69

EPS - basic reported (€)

 

 

(0.22)

(0.12)

(0.81)

(0.08)

0.62

Dividend per share (c)

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

(2.3)

6.4

33.4

39.4

28.6

EBITDA Margin (%)

7.2

12.6

3.5

10.7

20.0

Normalised Operating Margin (%)

(6.9)

2.2

(8.8)

2.2

13.4

BALANCE SHEET

Fixed Assets

 

 

43,841

39,007

168,468

180,426

191,383

Intangible Assets

32,008

31,016

160,386

174,134

186,754

Tangible Assets

8,838

7,216

7,351

5,513

3,675

Investments & other

2,995

775

731

779

954

Current Assets

 

 

6,094

17,086

18,369

36,977

44,834

Stocks

0

0

0

0

0

Debtors

3,841

3,923

7,018

9,589

12,082

Cash & cash equivalents

1,184

12,074

8,653

24,691

30,055

Other

1,069

1,089

2,697

2,697

2,697

Current Liabilities

 

 

(14,563)

(12,381)

(89,171)

(70,264)

(71,020)

Creditors

(1,848)

(2,747)

(3,197)

(3,515)

(4,270)

Tax and social security

(46)

(56)

(214)

(214)

(214)

Short term borrowings (includes lease debt)

(7,173)

(3,278)

(73,095)

(61,095)

(61,095)

Other

(5,496)

(6,300)

(12,665)

(5,440)

(5,441)

Long Term Liabilities

 

 

(10,195)

(10,768)

(27,426)

(26,693)

(33,693)

Long term borrowings (includes lease debt)

(7,481)

(7,641)

(9,927)

(9,927)

(16,927)

Other long term liabilities

(2,714)

(3,127)

(17,499)

(16,766)

(16,766)

Net Assets

 

 

25,177

32,943

70,240

120,447

131,505

Minority interests

(34)

0

0

0

0

Shareholders' equity

 

 

25,143

32,943

70,240

120,447

131,505

CASH FLOW

Op Cash Flow before WC and tax

4,037

3,765

(1,306)

4,610

11,464

Working capital

1,061

1,294

(1,149)

(2,253)

(1,738)

Exceptional & other

(2,516)

1,037

4,721

1,192

4,840

Tax

(188)

(154)

(229)

416

(3,275)

Operating Cash Flow

 

 

2,394

5,942

2,037

3,966

11,291

Capex

(3,120)

(2,008)

(3,149)

(2,000)

(2,000)

Acquisitions/disposals

4,888

0

(96,428)

(15,000)

(7,000)

Net interest

0

(157)

(1,636)

0

0

Equity financing

0

9,124

43,929

45,000

0

Dividends

0

0

0

0

0

Other

(4,408)

414

(2,772)

(3,927)

(3,927)

Net Cash Flow

(246)

13,315

(58,019)

28,039

(1,636)

Opening net debt/(cash)

 

 

9,127

13,472

(1,155)

74,370

46,331

FX

53

(199)

126

0

0

Other non-cash movements

(4,153)

1,511

(17,631)

0

0

Closing net debt/(cash)

 

 

13,472

(1,155)

74,370

46,331

47,968

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.

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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.

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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.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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