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EQS Group
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== Investment summary == === Company description: Growing regtech provider === EQS provides products and services that meet a market need for reliable, secure, trustworthy automation in compliance and investor relations (IR) – regulatory technology, or regtech for short. It has invested in building a cloud-based platform, COCKPIT, for both areas of the business, from which it derives Software-as-a-Service (SaaS) revenues. COCKPIT provides its clients with a dashboard from which to access the subscribed elements to manage their own workflows. It has 4,405 customers (as at end Q122), with 86% of revenues earned on a recurring basis and a churn of 5.7%. The more complex the corporate regulation framework, the greater the opportunity, with the current roll-out of the whistleblowing regulations across Europe widening the target market. === Valuation: DCF indicates valuation differential === The share price is 35% lower than at end FY21, dipping below the €33 price at which shares were placed in the subscription over February/March 2022. Financial software companies and global application software peers have also retrenched over the period, each by 32%. With earnings remaining subdued ahead of the anticipated whistleblowing stimulus, EV/Sales is the only realistic peer comparison metric, with EQS shares trading at valuation between the two peer groups on current year and FY2 EV/Sales. Edison Investment Research has also looked at a DCF, using a WACC of 9% (up from 8% to reflect the poorer economic backdrop) and terminal growth of 2%. Based on management’s targets of €130m of revenue and a 30%+ EBITDA margin for FY25e, with revenue growth tailing off thereafter as the effects of scale take effect, the implied share price is €47.66. There is obviously an element of execution risk here. Even if the EBITDA margin were to be set at 25%, the implied share price would be €37.88, 29% above the current level. === Financials: Waiting for the whistleblowing tailwind === Management guidance is for FY22e revenue growth of 30–40% (was 30–50%) and EBITDA of €6.0–10.0m (unchanged). Edison Investment Research's forecasts are also unchanged following the Q122 results, albeit its revenue number now lies towards the top of the indicated range. The Q122 figures showed revenues up 34% to €14.1m, with benefit from the acquisition of Business Keeper (consolidated from July 2021) lifting that figure from 7%. Management’s ambition is to build to group revenues of €130m for FY25e, driven mostly by demand for compliance products and services as the suite offered through the COCKPIT platform builds and cross-selling becomes more prevalent. Whistleblowing is set to be the main stimulus for this growth as the EU regulation becomes law across Europe. EBITDA margin is being held down currently (10.7% in FY22e) by the investment to grasp the whistleblowing opportunity and grow the client roster. The medium-term plan envisages its recovery to over 30% by FY25e, which Edison Investment Research regards as a challenging but feasible ambition. The Q122 fund-raise has put the balance sheet in a healthier position post the acquisitions, with gearing of under 10%. Given the high proportion of SaaS revenues, EQS should fundamentally have healthy operational cash conversion of around 100%, with the larger capital spend on building the cloud-based platform completed over FY17–20. === Sensitivities: Success of sales push === Having put so much effort behind the whistleblowing opportunity, the delays have been a clear frustration, but the group’s financial strength has provided a strong buffer. Any further slippage to legal implementation may mean further revisions to forecasts. Reaching the FY25 targets also requires success in cross-selling and building recurring revenue streams.
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