Eqs Group AG (DE:EQSn) is investing to take advantage of the opportunity it has to build a far larger enterprise and broaden its client base. The market for cloud-based tech systems to log and control aspects of corporate governance, risk and compliance is attractive and sits comfortably alongside its existing offerings in digital investor relations. The pursuit of this adapted goal, becoming a global tech B2B provider with high levels of recurring income, is costing the group short-term profitability, as shown in our reinstated forecasts, but the potential rewards are substantial. Earnings multiples are consequently high, but DCF analysis indicates a value of €86/ share.
FY17 and FY18 peak investment years
In September 2017, EQS management indicated increasing investment to take advantage of new opportunities to develop and market adjacent products and services. By the time of the year-end update in February 2018, the expected extra spend had grown and guidance for FY17 adjusted EBIT reduced from €2.0-2.3m to €1.3-1.5m. The delivered figure of €1.1m reflects FY17 investment of €2.1m, mostly in personnel and freelancers to enhance its cloud-based offering, plus €0.4m on international growth. The project has highlighted further options for attractive commercial enhancements. FY18 is now therefore also to be an investment year, towards a larger and more profitable long-term goal. Our expectation is that FY19e profits should rebuild to about the levels achieved in FY16, before starting to grow organically. Management indicates a top line CAGR of 17% through to FY25e.
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