06/03/2008
After practically doubling profits last year, Anglo-German software testing consultant SQS has already booked or contracted 51% of this year’s expected revenues, yet trades at a modest 9.1 times prospective earnings.
In 2007, sales advanced 53% to €121.1m (£92.7m) and, due to economies of scale that saw gross margin bulge to 34.5%, pre-tax profits soared 96% to €10.5m and powerful cash generation took funds to €7m. This means that since floating on AIM in late 2005 the company has doubled sales and tripled profits, organically and through astute earnings-enhancing acquisitions.
Industry trends are moving in the company’s favour, with more than two-thirds of businesses accepting that testing should be outsourced. ‘SQS has now got to a tipping point,’ adds David Cotterell, the rising star head of UK operations. ‘We’ve now got the scale to take on testing from larger companies.’
Recent wins include Irish utility EirGrid and email filtering expert MessageLabs, as total new client wins topped 140 over the year, with the number of long-term contracts rising from 8% to 11% of revenues. Many are attracted by SQS’s off-shoring facilities in South Africa and Egypt, where there is a surprising proficiency for the German language.
This year is off to a cracker and Cotterell reveals ‘there’s been no let up in demand and our client acquisition is continuing at the same run rate as last year.’ Company acquisitions are planned to further strengthen the leading European position and, says CEO Rudolf van Mengen, ‘to expand in markets such as Asia-Oceanic’.
A Company Watch recommendation here at 211.5p two years ago, the shares, although they have steadily marched higher, have not been outstanding. Up 10% on these results and still changing hands at a bargain rate and yielding 6%, they remain a convincing buy.
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| Market cap: | £58.1m |
| PE Forecast: | 9.1 |
| Share price: | 269.5p |
| AIM | £46.21m |
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