This is a quick and dirty look at SQS following this morning’s trading update.
About SQS Software Quality
“SQS is the world's largest supplier in independent software testing and quality management services. SQS consultants design and oversee quality management processes during software and IT systems development and test the resulting products for errors and omissions.
With more than 5,000 successfully completed projects under its belt, SQS has a strong customer base, including half of the DAX 30 companies, almost one third of the STOXX-50 companies and 36 FTSE-100-companies. Among the clients, there are names like Barclays, BP, Credit Suisse, Daimler, Deutsche Bank, Deutsche Post, Dresdner Bank, Eurobet, Eurogate, MessageLabs, Phoenics, T-Mobile, T-Systems, or Zurich Group.”
http://www.sqs-group.com/
Summary
Share price – 150p
Shares in issue – 26.2m
Market cap - £39.3m
The SP of SQS was ticking along nicely in the 200-250p range early in 2009 in expectation of, and then on the back of, the 2008 results http://www.investegate.co.uk/Article.aspx?id=200903100700105... which came in with:
Turnover up 18% to €142.9m
Gross profit up 19% to €49.6m
Gross margin 34.7%
Adj pre tax profit up 26% to €13.1m
Adj EPS up 5% to €0.43
Cash at 31/12/08 - €5.8m (~21p per share)
Proposed dividend – €0.11
Indeed, CEO Rudolf van Megen’s 2009 outlook statement as of 10 March stated “We are expecting a similar healthy performance for the first quarter of 2009, and, as such, are looking forward to the remainder of the year with a significant degree of confidence.”
Financials
Revenue (€m)
2008 - 142.9
2007 - 121.1
2006 - 78.9
2005 - 54.7
Adjusted EPS (€)
2008 – 0.43
2007 – 0.41
2006 – 0.28
2005 – 0.22
Y/E Net Cash (€m)
2008 – 5.1
2007 – 6.9
2006 – (3.2)
2005 – (5.9)
KABOOM!!
That was the sound of the SP imploding upon the release of a dire trading update on 14 May for the year to date:
“Trading in the early months of the year was in line with budgets. Latterly, however, tactical decisions by a number of clients to suspend live projects at short notice, often for a number of weeks, have meant that, despite new client wins, planned improvements in utilisation have not occurred. In addition, pricing levels have come under pressure,…
Thanks SM,
Definitely looks worth DYOR on, as a possible recovery play. Looking at Hemscott, it appears that broker forecasts were slashed following that trading update (unsurprisingly!). Calendar/financial year end forecasts now stand as follows:
| (p) | 2009 | 2010 |
| EPS | 16.1 | 20.2 |
| DPS | 5.3 | 6.2 |
So these put the company on prospective yields of 3.5% and 4.1% and P/Es of 9.3 and 7.4
The really big question is what is the likelihood that the forecasts will be beaten or missed? To answer this, one really needs to study the company's business and geographies. If one takes the view that outperformance is likely, then this could be an entry, OTOH a miss could well be punished further. It may be worth heeding the old adage that profit warnings come in threes... there could be an opportunity to pick these up considerably more cheaply later.
Best,
Mark
