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GB expands on global cyber fraud threat

A highly rated identity fraud specialist offers long-term value from a thematic angle and through solid operating performance
April 27, 2017

As digitalisation spreads, so do opportunities for cyber criminals. A recent report from fraud prevention organisation Cifas - based on statistics from 277 UK banks and businesses - shows there were 172,919 incidents of identity fraud in 2016, which represents 53 per cent of all fraud recorded by Cifas, of which 88 per cent occurred online. That represents the highest rate since records started 13 years ago. GB (GBG) is taking on these crooks and collecting itself plenty of loot in the process.

IC TIP: Buy at 335p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Growth of underlying markets
  • Strong balance sheet
  • Increasing global footprint
  • Growth through acquisition
Bear points
  • High forward multiples
  • Delay in GOV.UK Verify programme

Earlier this month, the cyber fraud prevention specialist told the market to be ready for a better than expected 27 per cent hike in adjusted operating profits for its financial year to the end of March 2017. While this was ahead of the consensus, an expectation-beating result was not such a great surprise given GB's compound annual growth rate of 32 per cent since 2012. We think forecast upgrades, on the back of increased penetration of international markets and improved prospects for cross-selling, should continue to drive the shares higher, despite what at first sight may look a high rating to some.

At the half-year stage, GB's international revenues had grown to 31 per cent of the total, up from 26 per cent a year earlier. That expansion was fuelled by strong growth in ID verification and fraud management services. And investors can expect more of the same, as the group is focused on the acquisition of technologies that can be rolled out globally. This was the strategy being pursued when GB bought IDscan Biometrics for £45m (including an £8m contingent consideration) last July. The integration of the business has added proprietary capabilities covering the reading, extraction and authentication of data from complex documents, including passports, visas, ID cards, driving licences, utility bills and work permits. The potential commercial applications aren't difficult to appreciate, nor their global dimension.

The cyber security market is fragmented and GB has established a track record of successfully integrating earnings-accretive acquisitions. And there's plenty of ammunition to continue to build the product offering and fund further expansion abroad; the group had net cash of £5.2m at its March year-end and has access to a £50m credit facility.

But while acquisitions will continue to provide an impetus, organic growth also looks strong. The group guided for a 12 per cent rise in organic revenues for the year, while overall revenue growth is expected to be 19 per cent. Improving margins mean this translates into the 27 per cent rise in operating profits, although a rise in the tax charge results in the fall in forecast EPS seen in the accompanying table. The progress last year is all the more impressive given the late launch of the GOV.UK Verify programme, which resulted in lower identity check volumes for the Royal Mail and the UK government, both of which utilise GB's new identity product, Citizensafe.

The organic growth rate will support investor confidence in the business model and GB's ability to benefit from the growing identity intelligence market. And the underlying problem - or opportunity - shows no sign of abating.

GB GROUP (GBG)
ORD PRICE:335pMARKET VALUE:£451m
TOUCH:334-335p12-MONTHHIGH:357pLOW: 208p
FORWARD DIVIDEND YIELD:0.8%FORWARD PE RATIO:32
NET ASSET VALUE:62p*NET CASH:£5.2m

Year to 31 MarTurnover (£m)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
201441.87.15.41.7
201557.310.37.51.9
201673.413.210.32.1
2017**87.416.510.22.5
2018**98.618.510.52.6
% change+13+12+3+4

Normal market size: 1,000

Matched bargain trading

Beta: 0.3

*Includes intangible assets of £99.7m, or 74p a share

**FinnCap forecasts, adjusted PTP and EPS figures