EQS Group — Digital investor relations

EQS Group (SCALE: EQS)

Last close As at 21/11/2024

40.80

−0.40 (−0.97%)

Market capitalisation

409m

More on this equity

Research: TMT

EQS Group — Digital investor relations

EQS is growing its sales strongly, stimulated by increasing regulation, and progressing in its ambition to become the leading global provider of digital investor relations. It offers a range of products and services, including its cloud-based solution, COCKPIT, which digitally maps the work processes of IR officers, streamlining them for maximum efficiency. Rising recurring and repeatable revenues, as well as continuing international expansion underwrite the top-line growth built into consensus forecasts, with the momentum implying that the valuation could have further upside.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

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TMT

EQS Group

Digital investor relations

Software

Scale research report - Initiation

25 April 2017

Price

€50.00

Market cap

€65m

Share price graph

Share details

Code

EQS

Listing

Deutsche Börse Scale

Shares in issue

1.3m

Net debt as at end December 2016

€2.6m

Business description

The EQS Group is a leading international technology provider for digital investor relations. 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 US and UK.

Remains in investment phase.

EBIT margin yet to trend up.

Analysts

Fiona Orford-Williams

+44 20 3077 5739

Bridie Barrett

+44.20 3077 5757

EQS is growing its sales strongly, stimulated by increasing regulation, and progressing in its ambition to become the leading global provider of digital investor relations. It offers a range of products and services, including its cloud-based solution, COCKPIT, which digitally maps the work processes of IR officers, streamlining them for maximum efficiency. Rising recurring and repeatable revenues, as well as continuing international expansion underwrite the top-line growth built into consensus forecasts, with the momentum implying that the valuation could have further upside.

Regulatory drivers

The role of investor relations is increasingly circumscribed by regulation and legislation designed to increase transparency and drive consistency. The recent introduction of the Market Abuse Regulation (July 2016) has increased both the scale and complexity of the compliance burden on companies across Europe, boosting sales of EQS’s INSIDER MANAGER. The consolidation of ARIVA (67% held) technically affected FY16 results, but gives greater benefit in the run-up to the implementation of the PRIIP regulation in January 2018. The impact of MiFID II is likely to be less directly beneficial but adds further layers of compliance that will need to be monitored and recorded – disciplines central to EQS’s various offerings.

Expansionary costs

In order to grasp the opportunities, EQS has needed to develop its infrastructure, in terms of systems, people and places. Slower expansion would have compromised the group’s ability to meet the needs of its target market. The costs have effectively been covered by internally generated cash flow, with the December 2016 placing, which raised €5.2m net to fund the next stage, the first such cash call. This investment programme has obviously affected the returns achieved to date, with consensus forecasts showing EBIT margin growth picking up from FY18.

Valuation: 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 23%. 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

40.9

1.5

12/16

26.1

1.8

0.96

0.75

51.2

1.5

12/17e

31.8

3.5

1.42

0.75

33.9

1.6

12/18e

34.9

4.3

1.89

0.81

26.4

1.7

Source: EQS Group accounts, Bloomberg. Note: PBT and EPS are stated before amortisation of acquired customer base, purchase price allocation and acquisition expenses.

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.

Company description: Digital IR solutions

EQS Group is one of the largest global providers of digital solutions for investor relations and for broader categories of corporate communications. These are products designed to automate and simplify the work processes for IR professionals, enabling them to meet all regulatory requirements and freeing up their time to deal with the messaging of their company’s equity story and strategy rather than on information processing. By ensuring that the product suites provided are constantly updated for the latest regulatory compliance changes and are delivered via intuitive interfaces, EQS should continue to add value for its users.

The group was founded in 2000 in Munich, initially building a strong market position in its home markets of Germany, Switzerland and Austria before starting to build out its presence in overseas territories. EQS looks to position itself as a partner with its client companies, working alongside them to solve issues and reduce inefficiencies, rather than simply as a supplier whose interest may not extend beyond the initial sales timeframe, with a growing emphasis on providing software-as-a-service (SaaS). The shift away from paper-based information to digital channels of communication between corporate entities and their various stakeholders is a key driver for growth and is a trend unlikely to be reversed.

EQS has expanded both organically and by acquisition and now employs around 300 people (including those brought into the group with the consolidation of ARIVA), of whom the largest number, 100, are involved in web, back-end, platform and software development. Its headquarters are in Munich, Germany, with further German offices in Hamburg and Kiel and offices in Switzerland (Zurich), Russia (Moscow), the US (New York), Dubai and France (Paris). In December 2015, the group purchased Obsidian IR in the UK (price undisclosed), which gave a strong foothold in that market on which to build. In the Far East, the group has operations in Singapore, Hong Kong, China (Shenzhen and Shanghai) and Taiwan (Taipei). This global network enables EQS to offer the global solutions sought by some of the largest multinationals.

The group’s technical operations are based in Munich, Germany, and Kochi in India. EQS’s solutions and services enable over 8,000 companies worldwide (up from 7,000 this time last year) to fulfil complex domestic and international corporate information requirements securely, efficiently and on a timely basis. Its increased stake in ARIVA (from a 25.44%-owned associate to 67% and consolidated) has added capabilities in the production of documents for packaged retail investment and insurance-based products (PRIIPs), further broadening the target markets to encompass the financial institutions.

Exhibit 1: FY16 Revenues by segment

Exhibit 2: FY16 Revenues by geography

Source: Edison Investment Research

Source: Edison Investment Research

Exhibit 1: FY16 Revenues by segment

Source: Edison Investment Research

Exhibit 2: FY16 Revenues by geography

Source: Edison Investment Research

Strategy

The group’s strategy is based around the three strands – digitisation, regulation and globalisation – and their impact on corporate compliance and investor communication. By simplifying, organising and automating the tasks that need to be fulfilled by IR professionals, their time is freed up to concentrate on face-to-face communication and more value-adding tasks. It also should reduce the risk of financial penalties or other sanctions from non-compliance with regulation.

The earlier growth strategy was predicated on increasing the range of products and services and rolling them out across different territories. To a large extent, the core of the growth strategy remains unchanged, but the increase in the scale of the operations has meant that management is able to lift its gaze and look at the more fundamental drivers of the next few years of growth opportunities. These fall into the three factors identified above.

Digitisation. As the business of corporate communications has become more complex, with different stakeholders with often very different requirements in terms of style and content, the attractions of digitising and automating as much of the process as possible are becoming ever more apparent. The tools that EQS has built to service this market have been designed to relieve the IR or communications teams of as many of the routine elements as possible, with the COCKPIT product allowing the client control over what is integrated. Driving the SaaS sales should protect it from avoidable client churn and improve the quality of the group’s earnings, as well as delivering a higher margin than one-off sales with a high element of customisation.

Regulation in financial markets changes regularly. There is some deregulation, such as the reduced requirements for publicising changes in voting rights in Germany, but considerably more in the way of tightening and extension of existing regulation, as well as the imposition of new requirements on corporate entities. With the rise of the larger asset managers, cash is increasingly seeking out investment opportunities globally and there is a correlated increase in expectation that some form of investor protection will be in place. The impact of changes in regulation can be a major factor. Well flagged, the reduction in the requirement to issue quarterly notifications in some circumstances following the introduction of the EU Transparency Directive had a marked impact on EQS in H116, with 46% fewer such announcements in H116 when compared to H115. There was, however, an increase in voluntary communications, which partially offset the decline of news volumes released through the COCKPIT. H216 benefited from the introduction of the EU’s Market Abuse Regulations, which came into force in July 2016. This extended the obligations to unlisted securities, opening up a new potential market area for EQS, one where those responsible will have less working knowledge of the day-to-day requirements imposed. Even for experienced IR professionals, the responsibilities are onerous and the risks of not complying with the requirements are heavy in terms of both finance and individual careers. This is helping to drive sales of contracts for the INSIDER MANAGER product, growing the group’s SaaS revenues.

Internationalisation. Being the market leader in its home markets, the potential for growth was self-evidently restricted. The steps into other markets, primarily through acquisition, have been taken carefully over the last few years, with the aim of building a global network of businesses that serve clients within their domestic markets and those larger, and/or global, concerns that want to have consistency between the markets in which they operate. EQS needs both global capability and local expertise. This requires local offices and local knowledge, which obviously has cost implications. However, by centralising the technical development and support functions, these capabilities can be leveraged across the network.

The growth strategy is also now predicated on increasing the amount of up- and cross-selling of products and services, increasing the average revenue per client and bolstering achievable margin.

Recent newsflow and upcoming catalysts

FY16 figures were released in early April 2017. The AGM is scheduled for 17 May, at which point the market will be updated for Q117. The interim results will be presented to the market on 14 August, with the Q3 statement on 15 November.

There are two impending pieces of financial market regulation that will directly affect EQS’s client base and the way that they conduct their investor relations processes. These are:

the PRIIP (packaged retail investment and insurance-based investment products) regulation, which will be mandatory across the EU, which is due to take effect at the beginning of 2018, extending this requirement to retail investment companies and insurance-based products – approximately 8,000 companies across Europe. The production of these leaflets is already mandatory for non-retail banks. ARIVA (67%-owned) has developed and launched a new turnkey software solution, which enables issuers in the financial sector to automatically generate documents for packaged retail investment and insurance-based products (PRIIPs), significantly reducing the administrative burden (currently either banks have developed their own software or generate these reports in a fairly manual way). ARIVA joined the group with a high-profile reference client for the software and management plans. It is leveraging EQS’s existing relationships with the financial industry to accelerate the rollout of this product, which has the potential to become a significant new product line.

MiFID II, also scheduled to take effect from early 2018. Although this does not have the same direct implications for clients as the PRIIP regulations will, the move towards more rigorous standards in corporate communications with investors fits well with the other elements of EQS’s client offering.

Market overview

The opportunity that EQS has to build its business ultimately depends on the health of financial markets around the world, documented through the number of listed companies across the global markets in which it operates. This is obviously a function of new listings, offset by de-listings, which have been a feature of the more mature markets. A company going through the IPO process is potentially the most remunerative client for EQS, as it may well be putting in place investor communication for the first time, therefore offering several possible income stream opportunities.

All companies operating in regulated equity and/ or debt markets will have requirements to communicate effectively with their stakeholders on a clear and consistent basis, with potentially onerous penalties for non-compliance.

EQS is the leading supplier in its field in its home markets of Germany and Switzerland, as well as in Russia, where it has been established for some time. It has early-mover advantage in faster-developing Asian markets.

In the more mature Anglo-Saxon markets, competition from established providers is more intense. By integrating its market offering to cover off all the required elements of investment relations, with the requisite understanding of local – as well as international – compliance, EQS should be in a position to offer an end-to-end solution for clients that operate in multiple territories.

Management, organisation and corporate governance

Supervisory board and management board

There are three members of the supervisory board and two members of the executive board. The role of the supervisory board is to oversee the executive board in the leadership of the company.

Management steeped in financial markets and IR

The group’s CEO is Achim Weick, who began his career at Commerzbank. Subsequently, he was co-founder of investor relations manager CMC Capital Markets Consulting. Achim is the originator, founder and largest shareholder of EQS and has been on the board since its foundation. COO Christian Pfleger joined EQS in 2001, initially as a client relationship manager, moving on to project management from 2003. In 2007, he took over responsibility for Products and Services. André Silverio Marques, who fulfils the finance function, previously ran the group’s Russian businesses. Before that, he was in charge of the IR, business development and corporate finance activities. Marcus Sultzer, CEO Asia-Pacific, is also a key team member. He joined the group in 2007 and was in charge of business development in Russia and the CIS from 2009.

Shareholders and free float

CEO Achim Weick is the largest shareholder, with 23% of the equity. Supervisory board members hold 8%, with the other executive board member holding 2%. 22% of the shares are held by Investmentaktiengesellschaft für langfristige Investoren TGV, a long-term, institutional investment fund. The free float is 45%.

Exhibit 3: Shareholders and free float

Source: EQS Group accounts. Note: SB = supervisory board, EB = executive board


Financials

Income statement

EQS is still in the investment phase of its corporate development, seeking to build meaningful positions in its key target geographic and product/service markets. The top line grew by 12.5% compound in 2009-15, with the larger uplift in 2016 reflecting the consolidation of ARIVA and the acquisition of the Swiss company Tensid during the year. German revenues increased by 38% (6% stripping out ARIVA) for FY16 vs FY15. Non-domestic revenues, though, grew 57%. Overall organic growth for the year was 4%.

A key emphasis is on building recurring and repeatable revenue streams (see Exhibit 6, below). The cloud-based revenues (up 29% FY16 over FY15) are in news, compliance and workflow functions, and, once set up (and once fixed infrastructure costs are recovered), should generate comparatively strong operating margins. Licensing revenues (+20% y-o-y) principally relate to filing, webcast and hosting. In FY16, the proportion of recurring revenues decreased to 68% (78%), due to the consolidation of ARIVA, which generates mostly project and media revenues. Although project revenues relate to discrete bits of business, some, such as preparation of report and accounts, can repeat on an annual basis.

The investment in corporate expansion, both in terms of product development and physical infrastructure, has put continued pressure on EBITDA margins, but is a prerequisite to building a sustainable, long-term business model. Consensus forecasts are assuming that there will be further contraction of EBITDA margin in the current year from 16.0% in FY16 to 14.9% in FY17, before starting to build in the following year as earlier expenditure starts to be leveraged, with a suggested level of 16.7%.

Company guidance for FY17 is for sales growth of 20-25% to €31.2-32.5m, with non-IRFS EBIT expected to increase by 10-20% to a range of €3.6-3.9m. The medium-term top-line guidance is for 10-15% average growth for the next five years.

Exhibit 4: Financial summary

€000s

2012

2013

2014

2015

2016

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

Income statement

Revenue

14,220

15,829

16,390

18,377

26,061

EBITDA

3,609

3,572

3,660

3,485

4,175

Profit before tax (as reported)

3,432

3,278

2,945

2,471

1,774

EPS (as reported) – (€)

N/A

1.83

1.57

1.20

0.96

Dividend per share (€)

0.00

0.75

0.75

0.75

0.75

Balance sheet

Total non-current assets

10,413

13,658

19,383

22,777

30,389

Total current assets

5,526

6,055

4,750

6,972

12,014

Total assets

15,939

19,613

24,133

29,749

42,403

Total current liabilities

(1,994)

(3,274)

(4,380)

(5,325)

(9,942)

Total non-current liabilities

(96)

(1,070)

(3,882)

(7,276)

(7,237)

Total liabilities

(2,090)

(4,344)

(8,262)

(12,601)

(17,179)

Net Assets

13,849

15,369

15,870

17,148

25,224

Shareholder equity

13,849

15,369

15,833

17,148

22,255

Cash flow

Net cash from operating activities

2,025

2,476

2,844

3,618

3,473

Net cash from investing activities

(587)

(3,290)

(4,710)

(3,024)

(2,944)

Net cash from financing activities

(731)

1,046

533

2,066

5,279

Net cash flow

707

232

(1,333)

2,660

5,808

Cash & cash equivalent end of year

2,748

2,980

1,370

3,607

6,610

Source: EQS Group accounts. Note: Reported numbers are stated before amortisation of acquired customer base, purchase price allocation and acquisition expenses.

Exhibit 5: Revenue and EBITDA

Exhibit 6: FY16 revenue by type

Source: EQS Group accounts

Source: EQS Group accounts

Exhibit 5: Revenue and EBITDA

Source: EQS Group accounts

Exhibit 6: FY16 revenue by type

Source: EQS Group accounts

Balance sheet and cash flow

Three key factors influenced the growth in the balance sheet in FY16: the consolidation of ARIVA; the acquisition of Tensid; and a capital raise in December 2016. This raised €5.2m (€5.4m gross) through the issue of 118,998 new shares at €45, with the funds earmarked to fund the group’s continued global expansion.

In FY16, EQS’s gross debt rose 11% to €9.2m (FY15: €8.3m) due to taking on the additional funding for the increase in the ARIVA holding, as well as the earlier acquisition of Obsidian IR in the UK. The increase in other liabilities is attributable to higher customer pre-payments at both Tensid and EQS, leading to absorption of working capital of €0.6m.

Net debt at the end of FY16 (post the capital raise) was €2.6m, giving gearing of 10.0% (FY15: 27.5%).

With the process of news dissemination highly automated, the regulatory information and news element of the business is particularly cash generative. This has enabled the group to demonstrate a high underlying cash conversion rate, which in turn has meant that it has effectively been able to fund its expansion programme to date through operational cash flow.


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 7: Comparison of valuation between EQS and global quoted peers

Agg. 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

Vertical - finance

6,669

34.5%

8.5%

4.4

14.0

4.2

13.6

Weighted software companies

12,708

27.4%

8.6%

3.9

14.2

3.7

13.9

B2B media businesses

53,966

23.1%

12.8%

4.6

17.9

3.3

12.8

Financial publishing companies

46,508

27.3%

7.4%

3.9

13.8

3.7

12.6

EQS

16.0%

17.3%

2.5

15.9

2.1

14.0

Discount to software comparatives (on average of relevant multiples)

23.2%

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

34.4%

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

23.0%

Source: Bloomberg, Software Equity Group, Edison Investment Research. Note: TTM = trailing twelve months, Prices as at 4 April. 2017.

The market valuations of technology software and financial publishing companies are now broadly similar as tech valuations have retrenched. Both are now valued by the market at lower multiples than those for the B2B media stocks, which are dominated by the large exhibition companies.

All three groups, though, are trading at higher valuations 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 23% discount to relevant software and financial publishing stocks, and on a 34% discount to B2B media stocks.


Sensitivities

There are a number of factors that will influence EQS’s financial performance, each of which may vary considerably across the operating territories. The three key elements of the growth strategy – digitisation, regulation and internationalisation – are themselves all important sensitivities for the future financial performance of the group, and are covered in the list of identified factors, below:

The number of listed companies (itself a factor of the environment for de-listings and/or IPOs).

The regulatory environment – the more complex the system and the greater the number and extent of changes to those systems, the greater the requirement for corporates to access relevant expertise. Introduction of additional regulation, such as the Market Abuse Regulations can breathe life back into markets that had looked dull at best.

Requirements for corporates to make information available in digital format, either through regulation or user demand.

The adoption of new channels of dissemination, such as the use of social media, where incumbents may have little expertise.

The relative health of corporate budgets.

The health of the corporate bond market.

Currency – the impact is obviously increasing as the group continues with its ambitions to internationalise the business. The bulk of the group overhead remains euro-denominated but revenues are increasingly generated in US dollars and US dollar-related currencies.

Events, such as 2015’s turbulence in Chinese markets (which led to a temporary suspension of new listings), may lead to further intervention to promote more professionalism in the market and a higher degree of institutional ownership, particularly from non-domestic investors. This could be helpful for EQS as local providers are less likely to have the relevant expertise to guide corporate clients.

Beyond these external factors, the group has internally generated sensitivities, which fall into the broad categories of system risk, personnel risk, geographic risk and acquisition risk.

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