SQS Software Quality Systems AG : Undervalued relative to peers, but don’t ignore the other factors

SQS Software Quality Systems AG relative valuation is now UNDERVALUED. It was previously rated NEUTRAL, and has a fundamental analysis score of 54.

Our analysis is based on comparing SQS Software Quality Systems AG with the following peers – Triad Group Plc, Microgen plc and Parity Group plc (TRD-GB, MCGN-GB and PTY-GB).

Relative Valuation

SQS Software Quality Systems AG’s price of GBP 5.15 is lower than CapitalCube’s implied price of GBP 7.12. CapitalCube believes that at these levels, SQS Software Quality Systems AG is undervalued and has upside potential. Over the last 52 week period, the stock has fluctuated between GBP 3.92 and GBP 6.45.

Relative Valuation

Company Overview

  • Considering peers, relative underperformance over the last year and the last month suggest a lagging position.
  • It trades at a lower Price/Book multiple (1.60) than its peer median (2.84).
  • The market expects SQS-GB to grow at about the same rate as the peers and to maintain the median returns it currently generates.
  • SQS-GB‘s relatively low net margins and poor asset turns suggest a problematic operating strategy.
  • The company’s year-on-year change in revenues and earnings are better than the median among its peer group.
  • SQS-GB‘s return on assets has improved from below median to about median among its peers over the last five years.
  • The company’s relatively high gross margin suggests some differentiation with pricing advantages versus peers.
  • While SQS-GB‘s revenues in recent years have grown faster than the peer median, the market gives the stock a P/E ratio that is around peer median suggesting that the market has some questions about the company’s long-term strategy.
  • The company’s capital investment seems appropriate for a business with peer median returns.

Investment Outlook

SQS Software Quality Systems AG has a fundamental score of 54 and has a relative valuation of UNDERVALUED.

SQS Software Quality Systems AG’s Fundamental Analysis Score is about average at 54, thus not allowing for a specific classification into the Value – Price Matrix.

Fundamentals Vs Relative Valuation

Quadrant label definitions. Hover to know more

Safety, Value Play, Value Trap, Speculative

Drivers of Valuation

The market expects SQS-GB to maintain the median rates of return it generates currently.

The market expects SQS-GB to grow at about the same rate as its chosen peers (P/E of 19.80 compared to peer median of 19.80) and to maintain the peer median return (ROE of 8.67%) it currently generates.

The company trades at a lower Price/Book multiple of 1.60 compared to its peer median of 2.84.

Valuation Drivers

Quadrant label definitions. Hover to know more

Outperforming, Harvesting, Challenged, Turnaround

SQS-GB has moved towards a median ROE and P/E from a relatively high P/E profile at the prior year-end.

ROE % (On Common Equity)
Price To Earnings

Peer Analysis

A complete list of valuation metrics is available on the company page.

Company Profile

SQS Software Quality Systems AG engages in the provision of software testing and quality management services. It designs and oversees quality management processes during the software and information technology systems life cycle and tests the resulting products for errors and omissions. It operates through the following segments: Managed, Specialist Consultancy, and Regular Testing Services. The Managed Services segment meet the demand of clients seeking efficiency in long-term engagement of which a growing share is delivered from nearshore and offshore test centers. This also includes long term engagements for testing standard software package products. The Specialist Consultancy Services segment meet the demand of clients seeking transformation and quality in specialized projects with skills like SAP, PLM (Product Life Management) Process Consulting and Improvement, and Load and Performance Testing. The Regular Testing Services segment meet the demand of more price conscious clients who tend to be served on a more local basis and are typically contracted for a short term. The company was founded by Heinz Bons and Rudolf van Megen in 1982 is headquartered in Cologne, Germany.

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