Companies: SQS ��

Europe’s largest software testing specialist, SQS, is growing almost four times faster than the IT services market and final results confirm it deserves more recognition.

Adding UK-based competitor Cresta to its British operations last July went some way towards raising Germany-based SQS’s profile and added bulk. In the year to December the enlarged group grew turnover from continuing operations by 44.2% to €78.9m (�53.8m), with organic growth at 18%. Visibility is excellent, with 75% repeat revenues. Furthermore, the group won a record 100 new clients during the year to take its total to around 400 active clients, including BP, Lloyds TSB, DaimlerChrysler and Airbus.

Underlying adjusted pre-tax profit increased by 44% to €5.3m and earnings by 27.3% to €0.28. Furthermore a dividend equivalent to 19p should be paid or, if German law forbids, an equivalent share buy-back completed.

Inclusion of Cresta for the full year would have seen the group produce revenues of €92m and, as SQS is improving cash flow, signing better deals and coaxing further organic growth. Altium has upgraded forecast sales for 2007 and 2008 to �100.3m and �110.8m respectively. Further investment in sales and marketing means profit expectations remain at �7.8m and �10m, and earnings at 31.4p and 32.4p per share.

Despite organic growth averaging more than 13% over the last three years in a market growing at over 5%, SQS has been under-rated. To a degree this can be explained by the company’s relatively small size, foreign origin and relatively low free float. However, the February acquisition of rival RelQ at 1.3 times revenues indicates that SQS, if an equivalent offer was made for it, could have a value of more than �80m.

There is plenty of growth out there for the taking and the shares, up 6.7% today to 208.5p, are still far too cheap. SQS is a strong buy.

SQS Software Quality Systems	AIM	�40.14m	233.50p	2.50p
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Other company articles:
SQS Software Quality Systems			08/03/2007
SQS still a strong buy			06/10/2006
SQS Software Quality Systems			13/09/2006
SQS’ Teutonic appeal			06/02/2006
Newcomer - SQS			20/09/2005