GB Group tests out its strategy

Cyber security technology company GB Group (GBG) used its full-year results to draw breath after a punishing 50 per cent slide in the company’s share price over the past 12 months. A combination of awful market sentiment around technology shares, the need to integrate a large US acquisition and fears around inflation all contributed to worsening sentiment. A further rise in the dividend and reassurances that the fragile geopolitical situation won’t have any real impact on GB helped to firm up the company’s share price on results day. However, there are still more questions than answers over the resilience of GB’s business model.

Its $736mn (£555mn) purchase of US cyber security company Acuant, gives the company greater scope in the US, albeit integration remains at an early stage. The main question with the acquisition is the price paid for Acuant, which to all intents and purposes was at the very height of the technology boom and just before prices started to slide. Therefore, the suspicion remains that GB significantly overpaid, which may put downward pressure on the £714mn of goodwill that is currently carried on the balance sheet. It also highlights the paradox that technology companies are often the prime customers, and acquirers, of similar types of technology companies, which can become awkward when the entire sector enters a severe downturn.

The other troubling question is whether GB will be able to pass significant price increases onto its subscriber base customers as inflation causes costs to rise. In a sense, this is more of a problem for the spending power of its customer base than for GB itself, but without a large capital base, or traditional inventory stock, GB will find it difficult to use its balance sheet to defend its margins. Currently, GB’s operating margins are 24 per cent on an underlying basis, a slight fall from 2021 as the pandemic effects unwound.  

There could be a case for a contrarian investment approach to GB, with the share price fall bringing the consensus-based PE ratio down to a much more reasonable 20 for 2023. However, it will probably take a real change in market sentiment, plus solid evidence that it can protect its margins, before conditions are right for the shares to re-rate. Hold.

Last IC View: Hold, 787p, 30 Nov 2021