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GB Group: a verifiable growth stock

The software stock is a top holding of a top small-cap stockpicker for good reason
February 20, 2020

Identity fraud shows no signs of abating. The number of cases recorded in the UK climbed by 8 per cent to 189,108 in 2018, according to the latest report from fraud prevention service Cifas. Faced with the simultaneous burden of intensifying data protection rules, companies all over the world are under huge pressure to safeguard themselves and their customers from the repercussions of cyber crime. This offers GB a market opportunity estimated to be worth $20bn or more.

IC TIP: Buy at 699p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points

Strong growth

Expanding internationally

Significant market opportunity

Fund manager favourite

Bear points

Acquisition integration risk

Risk of cyber-attacks or breaches

With an ability to verify more than 4.4bn people across 72 countries – or 60 per cent of the global population – GB Group (GBG) stands ready to capitalise on this growth market. As a specialist in identity data intelligence, it helps big-name organisations – including e-commerce giants and major banks – to quickly validate the identity and location of their clients. Its software products are built on a huge network of data from more than 270 partners.

Smart small-cap fund managers are backing the company’s prospects. “The business has robust demand drivers,” says Elaine Morgan, the manager of the top-performing Kames UK Smaller Companies fund, which counts GB as a top holding. “Solutions form an important component of core customer processes, there is a high degree of recurring revenue and market demand is growing as more businesses grow online, internationalise and are covered by ever tightening regulatory requirements such as KYC [know your customer] and AML [anti-money laundering].”

Reflecting the strength and popularity of GB’s product offering, the group enjoyed a compound annual revenue growth rate (CAGR) of 24 per cent over the seven years to March 2019, with adjusted operating profits CAGR of 36.3 per cent.

Acquisitions have played a significant role in GB’s expansion. At the time of its 2019 annual numbers, it had bought 12 businesses over the previous eight years. At constant currencies, organic revenues increased by 11.5 per cent last year, compared with 19.9 per cent including acquisitions.

Acquisitions have also helped to extend GB’s reach overseas. Most recently, the group’s largest purchase to date – that of IDology for $300m (£231m) in February 2019 – materially enhanced its footprint in North America. Buying VIX Verify in October 2018 for £20.6m bolstered its position in the Asia Pacific region. Half-year numbers to September saw international revenues exceed those from the UK for the first time, rising from 35 per cent to 57 per cent of the total business. 

GB’s half-year net debt stood at £53.8m, compared with net cash of £18.6m a year earlier, reflecting the two acquisitions, along with £160m raised by placing shares at 410p to help fund the IDology deal. The dilution is reflected in the temporary fall in forecast EPS. Importantly, the group is strongly cash-generative thanks in part to advanced payments by customers. First-half operating cash to Ebitda (cash profits) was 104 per cent.

GB’s deal-doing makes for large differences between statutory and adjusted numbers (see chart). Of last year’s £16.6m adjustment, £10.3m for amortisation of acquired intangibles looks justified – perhaps less so the adjustments for regular exceptional costs associated with acquisition expenses and staff reorganisation (£4m last year), and share-based payments (£2.3m). 

 

GB (GBG)    
ORD PRICE:699pMARKET VALUE:£1.4bn 
TOUCH:698-700p12-MONTH HIGH:806pLOW:427p
FORWARD DIVIDEND YIELD:0.5%FORWARD PE RATIO:39 
NET ASSET VALUE:175p*NET DEBT:18%** 
Year to 31 MarTurnover (£m)Pre-tax profit (£m)***Earnings per share (p)***Dividend per share (p)
201788.016.512.82.60
201812025.815.02.60
201914431.317.92.80
2020**19439.015.83.10
2021**21744.317.93.40
% change+12+14+13+10
NMS:2,000    
BETA:0.39    

*Includes intangible assets of £426m, or 220p a share

**Includes lease liabilities of £6.4m

***Peel Hunt forecasts, adjusted PTP and EPS figures