EQS has accelerated its investment plans to take advantage of the timing opportunity as new and complex regulations regarding data privacy, corporate governance, compliance and risk are introduced. With additional spend of €2.2m planned in the current financial year and €5.8m over the following three years, this obviously has an impact on short-term profitability. However, it opens up a broader set of revenue streams from a greater number of potential clients. We have revised our numbers to reflect the financial impact. The share price has reacted positively to the news and the valuation is now broadly in line with global peers.
Our FY17 forecast adjusted EBITDA moves from €4.7m to €3.6m, while FY18e moves from €5.6m to €4.5m, reflecting the investment in additional IT development staff and in product development. The earlier launch of the whistle-blowing module SAFECHANNEL was very well received, which has encouraged the acceleration of the timing of the launch of additional functionality. With the impending introduction of MiFID II, updates to the corporate governance code in Germany and the Sapin II anti-corruption regulations in France, the window of opportunity for launching product and locking in client contracts is relatively tight. There are good opportunities to cross- and up-sell to clients who have already taken INSIDER MANAGER and/or SAFECHANNEL, who will already have completed their due diligence on EQS as a supplier.
At the end of September, EQS bought a 10% stake in NYSE-listed Issuer Direct, for €3.1m. This locks it in with Issuer Direct’s Accesswire, with which EQS already has a collaborative relationship, and gives a stronger foothold from which to develop the US business. The group raised €5.2m in December 2016 to fund continued global expansion. The scale and timing of these enhanced investment requirements, though, have led to management indicating no FY17 dividend payment.
EQS clearly remains in its investment/growth phase, so comparisons with large global financial information companies are inevitably distorted. Using average historical and forward multiples to revenue and EBITDA, EQS trades broadly in line with peers, the share price gaining over 50% in the last year and continuing to climb post the investment announcement at the end of September. DCF analysis suggests further upside if medium-term growth reaches management’s anticipated rate.