QUEST HOLDINGS | “In quest for more” - initiation of coverage

Well-diversified with an IT tilt – Quest is a tech-oriented holding group active in 5 segments via specialized subsidiaries, most of which are among the leaders in their respective sector. Its portfolio spans across segments such as electronic transactions, courier services, trade of IT products, implementation of ICT projects and operation of renewable parks, namely industries which are quite diverse, thereby mitigating risks from cyclical swings. The profit mix is quite balanced while most segments are in secular growth and are primed to be further propelled by EU funds. Overall, we expect 12% group revenue CAGR through to 2023e mostly underpinned by low teens growth for the courier business (e-Commerce rise, pricing, mix) and IT products (digitization, market share gains) and high single-digit growth for other segments. Impressive profit compounder; we expect 15% EBIT CAGR in 2020-23e – Quest has been a consistent earnings compounder with a strong execution track record, having delivered >20% EBIT/EBITDA CAGR since 2015. Looking ahead, we expect the pendulum of operating leverage to remain positive, with the 12% 3-year sales CAGR filtering through to a 15% EBIT CAGR (2020-23e) as COVID-related expenses roll-off. Startling commitment to growth & investments – Quest has spent c€120m over 2015-2020, namely almost 2x the cumulative EBITDA generated during the previous 5 years (2010-2014). Simply put, Quest invested its way to superior growth. The result was even more impressive from a returns’ perspective, with the group having grown EBIT by almost €40m over 2015-2020, thereby achieving a 32% operating return (pre-tax) on the aforementioned investment. Given its robust financial position (€10m net cash as of Dec’20, to be further propelled by proceeds from the Cardlink sale), Quest has enough war chest to seek new growth avenues. Balance sheet optionality – We estimate that a generic acquisition of a target company with €50m revenues and a pre-synergy EBITDA margin in the mid to high-single digits could be c5-8% EPS accretive, corresponding to a value creation near €1-1.2 per share. Alternatively, Quest could deliver additional shareholder value through heftier returns to shareholders. This would be even more so the case after the disposal of Quest’s stake in Cardlink (recently agreed with Wordline), with the transaction expected to boost the group’s liquidity position by >€90m (in H2’21). The shareholder return track record is solid (70% of cumulative 5-year net profit, further topped up by the return in kind associated with the REIC demerger), testament to mgt’s commitment in creating shareholder value. Valuation – The stock is 60% above pre-COVID levels, yet 2021e EBIT will also be c45% higher than 2019. We believe the current valuation constitutes a compelling risk-reward proposition, as we argue there is substantial latent value to be crystallized over time by rising shareholder returns and/or acquisitions or disposals of stakes in subsidiaries. Our SOTP-based valuation – post the application of a 10% holding discount – yields a baseline value of €18.4 and a €16.8-20.4 indicative range.