SQS Software Quality Systems hit the headlines in late September by not only becoming the first German firm to list on AIM but also the first to obtain a primary listing in London.

The shares were well received, with the company raising £10.8 million via a three-times-oversubscribed placing at 190p. But while subsequent news flow has hinted that the Cologne-headquarted group possesses considerable potential, the shares have thus far risen by a relatively modest 11 per cent.

The IT solutions company specialises in providing software testing and quality management services to medium and large corporate customers, as well as associated services including training, testing tool provision and the like. Software is becoming ever more important to business performance, so it is essential that newly developed or purchased applications fit the purpose for which they are intended. This may sound obvious but, according to estimates from research group Gartner, up to 50 per cent of all business IT projects actually fail. SQS offers a third party assessment service to ensure failure is avoided.

‘Our main focus is on trying to find errors in software systems before they go live,’ asserts SQS finance director Rene Gawron. ‘If you identify problems prior to this point it makes it both easier and cheaper to fix them. As well as this fire-fighting, we also work on improving processes and pre-empting future problems.’

The model seems to hold great appeal for SQS’s customers. 2004 saw the group generate revenues of C48.7 million (£33.4 million), and a C2.7 million profit, from eight offices across five European countries. The UK is one of SQS’ prime markets with clients including M&S, Tesco and Lloyds TSB.

However, SQS’ focus on assisting with individual projects does pose problems. For one, clients tend to employ SQS on a project-by-project basis, making recurring revenues tough to predict – a point Gawron addresses by stating that ‘typically our customers will have between 30/40 projects running in any one year.’

Moreover, the types of firms SQS targets typically boast their own IT departments, which can be hugely problematic in its own right. ‘This is still a rather young market and people are just starting to realise that software testing and quality management are things that should really be done by third parties,’ Gawron admits. ‘The biggest problem we come across are the in-house IT departments. They often need to realise that while they can do some testing, they just can’t carry out the crucial optimal checks we can.’

As things stand, the outlook seems very rosy. SQS will publish full year results for the year to December in early March and forecasts from house broker Evolution Securities suggest profits will rise 44 per cent to C3.9 million, on sales of C53.8 million. This translates to 20.3c of earnings (13.8p), which places the shares on an immediate prospective p/e of 15.3.

Although this may not seem an especially cheap, a recent trading statement has seen SQS confirm that the figures are ‘anticipated to be in line with expectations’, and should the company then go on to generate the C5.6 million profit and 26c (17.7p) of earnings expected for 2006, the p/e multiple would swiftly fall to 11.9, unusually low for a profitable IT services business. Buy.

SQS Software Quality Systems	AIM	£46.9m	205.50p	0.00p
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