GB Group facing post pandemic headwinds

GB Group (GBG) provides identity verification and fraud prevention software. This meant that it was, in some regards, a lockdown stock. The rise of crypto currency and the surge of ecommerce boosted demand last year, but now macro conditions are generating headwinds as markets slow down.

Identity makes up 61 per cent of revenue but on a pro-forma basis revenue declined 1.4 per cent. GB said this was because of crypto currency headwinds. Those winds may abate at some point, but based on the recent demise of FTX, a crypto currency collapse looks more than likely. House broker Numis expects crypto to make up 2 per cent of revenue, down from 6 per cent last year.

Group pro-forma revenue rose 10.4 per cent, in strong part due to foreign exchange tailwinds. However, group revenue was still up 3.4 per cent on a constant currency basis, thanks to 10.4 per cent growth in the location division. Location is software which formats addresses, making it easy for customers to input their details when ordering items online.

Management hopes the $736mn (£616mn) acquisition of US-based Acuant at the end of last year will boost profit, as it will enable the cross selling of products. In software it can be difficult to acquire new customers, so acquisition is a popular avenue for growth. The promised £5mn of cost-saving synergies will be welcome for investors.

Broker Numis is confident the acquisition will stimulate growth once the “transitory” phase passes. It expects adjusted EPS to rise 4 per cent to 18.8p in 2024, giving a PE ratio of 18.6. For a software company with around 80 per cent cash conversion this doesn’t look overly expensive. But we would like to see some evidence of growth before the Acuant acquisition can be considered a success. Hold.

Last IC View: Hold, 427p, 17 June 2022