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Currency in EUR
Last close As at 24/03/2023
EUR21.50
▲ −0.10 (−0.46%)
Market capitalisation
EUR217m
Research: TMT
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.
EQS Group |
Whistleblowing increasing in volume |
FY21 results |
Software & comp services |
12 April 2022 |
Share price performance
Business description
Next events
Analysts
EQS Group is a research client of Edison Investment Research Limited |
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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 |
PBT* |
EPS* |
EV/EBITDA |
P/E |
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
|
|
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