Accelerating momentum

GB Group 13 June 2016 Update

GB Group

Accelerating momentum

Full-year results update

Software & comp services

13 June 2016

Price

294p

Market cap

£364m

Net cash (£m) at March 2016

8.7

Shares in issue

123.9m

Free float

95%

Code

GBG

Primary exchange

AIM

Secondary exchange

NA

Share price performance

%

1m

3m

12m

Abs

0.0

17.6

38.0

Rel (local)

0.4

15.8

52.7

52-week high/low

321.0p

203.8p

Business description

GB Group has complementary identity data intelligence offerings of verification, capture, maintenance and analysis, enabling companies to identify and understand their customers.

Next events

AGM

July 2016

Analysts

Bridie Barrett

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

GB Group is a research client of Edison Investment Research Limited

Revenue growth of 28% and favourable product mix effects offset the impact of additional sales and product investment; as announced in April, operating profits increased 24%. Trading remains strong and we forecast acceleration in organic revenue growth in FY17. We initiate FY19 forecasts, looking for double digit EPS growth to continue. GB Group (GBG) has an excellent track record of creating value through M&A. With net cash and strong cash conversion, this could be added to by probable acquisitions.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/15

57.3

10.5

6.7

1.9

44.0

0.6

03/16

73.4

13.2

8.2

2.1

35.8

0.7

03/17e

89.0

14.9

9.1

2.3

32.4

0.8

03/18e

100.1

17.3

10.3

2.5

28.5

0.9

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments EPS assumes a normalised tax rate of 21%

FY16 results: Strong across the board

Revenue growth of 28% comprised organic growth of 16% and 12% from the April 2015 acquisition of Loqate. Gross margins increased 4pp and benefited from several factors including economies on data acquisition costs and stronger growth from the higher-margin fraud services. This enabled GBG to absorb the impact of expanding its international sales efforts and investment in new products. At 18.3%, operating margins were only slightly down year on year, c 1.5pp ahead of the market’s expectations (announced in April). A dividend of 2.08p (+12%) has been announced.

Forecasts: Good visibility, FY19 initiated

FY17 has started well and with c 70% of recurring revenues and 20% of our forecast covered by deferred revenues, we remain confident that our forecasts for accelerating double-digit organic growth are underpinned. In addition to expanding GBG’s six existing services, FY17 will also see first revenues from the launch of two new services: the GOV.UK/Verify platform and fraud bureaus for financial services companies in several Asian markets. Both these initiatives have the potential to make a meaningful contribution to revenues over the coming years. We make little overall change to our FY17 and FY18 forecasts and initiate an FY19 EPS of 11.6p.

Valuation: Premium rating justified

GBG’s premium P/E rating of 32.4x in FY17 (March year end) is justified: organic growth prospects remain strong and, with £8.7m of net cash and a £50m revolving credit facility in place, acquisitions are likely – management has an excellent record in creating value from M&A. While there may be some nerves over the retirement of longstanding CEO, Richard Law, he plans to remain fully involved with the business until a replacement has been appointed and transitioned.

FY16 results overview

Results highlights: Strong earnings growth despite investment

GBG announced in April that, at £13.4m, its operating profit would be ahead of market expectations (our previous estimate was £12.1m). The preliminary results therefore hold no major earnings surprises. However, the composition of the reported 22% growth in EPS reveals ongoing momentum across all business lines, particularly internationally, and some helpful revenue and margin mix effects.

Revenues increased 28% with all lines growing strongly (Identity Proofing, IDP, +32%; Identity Solutions, IDS, +25%) and another year of accelerating organic growth (16% in FY16 vs 15% in FY15). Gross margins increased by 4pp to 76%, which enabled GBG to absorb incremental investment in personnel, product development costs and the operating losses from last year’s acquisition of Loqate without significantly denting the operating margin.

Cash conversion remains very strong – the majority of R&D costs are expensed and in FY16 91% of EBITDA was converted to operating cash. After £12.2m of acquisitions (£6.5m Loqate, £4.7m DecTech, £1.0m CDMS), £1.8m capital expenditure and £2.3m dividends, GBG reported £8.7m net cash. A full year dividend of 2.08p has been announced.

Exhibit 1: FY results summary and variance to forecast

 

2015a

2016a

Growth

2016f

Variance to forecasts

IDP (Identity Proofing)

25,167

33,213

32.0%

32,100

3.5%

IDS (Identity Solutions)

32,116

40,188

25.1%

43,900

(8.5%)

Total revenue

57,283

73,401

28.1%

76,000

(3.4%)

Gross profit

40,835

55,795

36.6%

54,900

1.6%

Gross margin

71.3%

76.0%

72.2%

EBITDA

11,844

14,772

24.8%

14,720

Total EBITA

10,790

13,428

24.4%

13,400

0.2%

EBITA margin

18.8%

18.3%

17.6%

Amortisation of acquired intangibles

(1,986)

(2,501)

(2,340)

Share based payments

(971)

(1,245)

(1,500)

Exceptional items

(1,629)

(94)

(21)

Share of associate

(10)

-

Reported operating profit

6,194

9,588

9,539

0.5%

Finance charges

(266)

(270)

(300)

PBT - adjusted

10,524

13,158

13,100

0.4%

PBT - reported

5,928

9,318

9,239

Tax

(1,127)

(178)

(2,100)

FX

(684)

1,096

-

Net comprehensive income

4,117

10,236

7,139

EPS - adjusted, diluted *

6.7

8.2

22.4%

8.2

0.4%

EPS - reported, diluted

3.9

7.2

84.6%

5.8

23.6%

Source: GBG. Edison Investment Research. Notes: * Edison’s adjusted EPS is stated net of an assumed 21% tax, which we consider gives a better picture of the underlying earnings of the group, but can understate earnings in years where tax losses or assets have been used.

Full-year adjusted EPS of 8.2p was up 22% y-o-y. in line with our forecasts. This strong growth was driven by:

28% increase in revenues, 16% of which was organic, with the April 2015 acquisition of Loqate contributing 12%. While a strong performance, this growth was behind our estimate of £76m, with organic growth slowing marginally to 13% in the second half of the year from 18% in the first half.

Although revenues were slightly behind forecast, gross margin of 76% (up from 71% in FY15) was well ahead of our forecast of 72%. This increase is due to a number of complementary factors: product mix effects (1.7% of the increase), the migration of its ID Verification customers over to its ID3 Global platform (1.2%), economies on data acquisition costs (1.8%) and strong growth from the higher gross margin fraud management solutions.

In line with strategy, the group stepped up investment in the international roll-out (GBG now has three global product lines and international revenues account for 26% of the group, up from 19% in FY15), as well as product development into the GOV.UK/Verify services (launched in March 2016) and the fraud bureau initiatives. This incremental investment together with start-up losses at Loqate meant in FY16 the typical operating leverage that the 37% increase in gross profit would normally drive was muted. However, despite a 41% increase in operating expenses, operating margin of 18.3% was only slightly down on FY15 (18.8%).

The utilisation of tax losses from the recent acquisitions, R&D tax relief and the release of prior over provisions meant that the effective tax rate was only 1%. On this basis, adjusted EPS in FY16 is 10.6p, +34% (GBG definition).

Our adjusted EPS calculation of 8.2p in FY16 (+23%) assumes a normalised tax rate of c 21%. With £18m of carried forward trading loss (which translates into c £3m of tax assets for future use), it is unlikely GBG will pay a full tax rate for a number of years. Although our measure of EPS is conservative, we believe it gives a more meaningful picture of the underlying longer-term earnings potential of the group.

Outlook: Accelerating growth momentum, active M&A pipeline

The structural tailwind for growth in the identity verification industry remains firmly in place (see our February report Globalising Identity Solutions for the industry background) and GBG is executing well on its strategy to gain share in this growing market through its own organic initiatives in parallel with an active acquisition pipeline. On both fronts, we expect GBG to remain dynamic in the coming year.

Organic growth: We retain our FY17 revenue forecast, which assumes organic growth of c 19% and 12.5% in FY18 and FY19 (initiated). Management has indicated that trading remains in line with its expectations; momentum and prospects remain strong. Approximately 70% of revenues can be considered recurring and deferred revenues at the year-end of £13.8m represent c 16% of our FY17 revenue forecast. Furthermore, two notable new projects – the GOV.UK/Verify platform and retailer fraud bureaus – have launched recently and should incrementally contribute to revenues as the services scale during FY17.

GBG powers two of eight providers that have qualified to provide the software to drive the new GOV.UK/Verify service (which will replace the current government gateway by 2018), a project the government hopes will help it save billions in administration costs by enabling users to be verified remotely for a host of services such as self-assessment tax submissions, driving licence applications, pensions and allowances etc. GBG will be offering the service directly via its own brand ‘CitizenSafe. The Royal Mail has also chosen GBG to be the ID partner on its service, meaning GBG is powering two of the eight authorised services on offer. Collectively, the eight providers are dealing with approximately 24,000 verifications a month at the moment. It is still early days and drop-out rates for users remain high. However, assuming the early teething troubles can be ironed out, the government estimates the market will be worth £150m by 2020. If GBG can take its share of this, the new service could become a material source of revenues for the group, with the scope to launch similar services in other markets internationally (an Australian version is being developed).

GBG is launching a number of fraud bureaus for retailers across Asia. These bureaus enable communities of businesses or government agencies to collaborate to combat fraud and are growing in popularity. The first bureau, in Korea, went live several years ago and 18 countries are targeted over the next three years.

Acquisitions: GBG has made eight acquisitions over the last five years, adding capabilities, datasets and client reach as well as driving revenue and cost synergies; DecTech for instance has seen growth accelerate from 5-10% to 20-30% since acquisition, and has facilitated the launch of new products internationally (fraud bureau).

The market for data and capability remains fairly fragmented internationally and, with a strong balance sheet (£8.7m net cash, high EBITDA to operating cash conversion and a new £50m revolving credit facility in place (incorporating a £20m accordion option), we expect GBG to continue to be active – the current pipeline of potential acquisitions is reportedly very strong with an emphasis on capability that can be deployed globally. Management does not disclose its valuation criteria; however, multiples to date are consistently below its own rating and all deals have been earnings accretive by year two.

Initiating 2019 forecasts: Double-digit earnings growth

For FY17 and FY18 we are making some changes to the mix of our earnings forecasts (higher gross margin offset by higher investment); at the operating and net earnings level, we leave forecasts broadly unchanged. We also initiate an earnings forecast for FY19 of 11.6p – summarised in Exhibit 2 and presented in full in Exhibit 7 at the back of this report.

Exhibit 2: Summary forecast changes

 

2017 - previous

2017 - new

% change

2018 - previous

2018 - new

% change

2019 (initiated)

IDP

41,500

42,000

46,688

48,300

55,545

IDS

47,500

47,000

51,300

51,825

56,595

Total revenue

89,000

89,000

0%

97,988

100,125

2%

112,140

Gross profit

64,600

67,626

5%

71,378

76,090

7%

85,235

Gross margin

72.6%

76.0%

72.8%

76.0%

76.0%

EBITDA

16,340

17350

6%

19,185

20,319

6%

23,039

EBITA

14,940

15,150

1%

17,613

17,619

0%

20,214

EBITA margin

16.8%

17.0%

18.0%

17.6%

18.0%

Amortisation of acquired intangibles

(2,540)

(2,540)

(2,540)

(2,540)

(2,540)

Share based payments

(1,600)

(1,600)

(1,700)

(1,700)

(1,699)

Reported operating profit

10,800

11,010

13,373

13,379

15,975

Finance charges

(300)

(285)

(300)

(300)

(300)

PBT - adjusted

14,640

14,865

2%

17,313

17,319

0%

19,914

 

 

EPS - adjusted, diluted

9.0

9.1

1%

10.3

10.3

0%

11.6

Source: Edison

Valuation and investment case: Premium deserved

The shares have continued to perform strongly into results and now trade on a FY17 P/E of 32x and EV/EBITDA of 21x a considerable premium to sector peers (average P/E 23x, average EV/EBITDA 11.9x). Our reverse DCF implies the shares are discounting c 10% organic growth over the next five years (at a 10% WACC and 2% terminal growth from 2020). While the shares are already recognising good prospects, based on the group’s current momentum, management’s track record in creating value from acquisitions and the group’s own strategic value in a consolidating market, we believe this premium value is justified. Investors should also consider the following:

Following a string of high-profile identity data breaches over the last three years, companies are devoting more resource to staying ahead of potential fraud, supporting a strong market backdrop for identity data services.

GBG is one of the largest providers of identity data intelligence in the industry, and is one of the few truly global data identity intelligence companies. It has three global offers and can verify c 4.3 billion consumers globally, with know your customer (KYC) and anti-money laundering (AML) standards reached in 40 markets; 26% of GBG’s revenues are from outside the UK.

Approximately 70% of revenues are recurring, gross margins are high and platforms are scalable, which should lead to good operating leverage (once the current investment phase plateaus) and strong cash conversion.

GBG has net cash, is highly cash generative and is targeting additional acquisitions. Management has experience in integrating acquisitions successfully, which could create additional value.

The strategic value that GBG may hold or achieve in a consolidating market for data management groups.

Track record – GBG has executed its strategy well. Over the last three years, organic revenue growth has accelerated and CAGR in adjusted earnings has been 30% (Exhibit 5 and 6).

CEO Richard Law, who announced his retirement in April, plans to remain at GBG for as long as necessary to ensure a smooth transition to the incoming CEO.

Exhibit 3: Summary peer valuation multiples

Description

Year end

Price

Market
cap (m)

Sales growth

EBIT
margin

EV/Sales
(x)

EV/EBITDA
(x)

EV/EBIT
(x)

P/E
(x)

Year

Curr.

Next

Curr.

Curr.

Next

Curr.

Next

Curr.

Next

Curr.

Next

GB Group*

Identity intelligence

Mar 16

294p

£364

21%

13%

17%

4.2

3.7

21.3

18.2

24.5

21.0

34.2

28.5

Experian

Information services

Mar 16

119c

$12,555

4%

6%

26%

3.3

3.1

9.4

8.8

12.7

11.8

13.8

12.7

RELX

Publishing/ risk management

Dec 15

1307p

£13,888

9%

3%

30%

2.7

2.7

7.8

7.5

9.1

8.7

18.8

17.6

Acxiom

Data management

Mar 16

1270c

$1,685

4%

8%

3%

1.9

1.8

12.4

10.4

56.6

28.1

39.2

29.9

Fair Isaac

Credit/ risk analytics

Sept 16

22c

$3,547

3%

6%

19%

4.7

4.4

18.8

16.2

24.8

21.6

28.3

24.2

Equifax

Credit/ risk analytics

Dec 15

114c

$14,933

17%

9%

26%

5.1

4.7

14.8

13.1

19.6

17.1

24.1

21.6

Accenture

Consultancy

Aug 16

125c

$74,318

-1%

7%

15%

2.1

2.0

12.7

11.9

14.6

13.5

22.3

20.5

MicroStrategy

Identity security

Dec 15

119c

$1,827

-1%

6%

24%

2.6

2.4

7.6

6.9

10.6

NA

21.0

18.4

Gemalto

Identity security

Dec 15

195c

€4,953

3%

7%

14%

1.6

1.5

8.9

7.7

11.9

10.0

13.8

12.0

VASCO DSI

Identity security

Dec 15

56c

$683

-12%

13%

NA

2.6

2.3

14.9

10.6

NA

NA

25.3

17.9

Average (excluding outliers)

3.1

2.8

11.9

10.4

14.7

13.8

23.0

Source: Bloomberg. Note: * Edison forecasts. Priced at 10 June 2016.


Company snapshot: Identity data intelligence

GBG is a global specialist in identity data intelligence. Its products and services help organisations in both the public and private sectors make better decisions about their customers and employees. Among other things, its services are used to improve the quality of customer data and the on-boarding process, as well as help organisations protect themselves against the large and growing problem of identity fraud. GBG is expanding the range of identity services it can offer, to an increasing number of clients in a widening geographic footprint. In addition to its organic product and market initiatives, it has an active acquisition strategy and over the last five years has made eight acquisitions. It is now one of the largest providers in the industry, able to verify c 4.3 billion consumers globally, with KYC and AML standards reached in 40 markets. Its products and services are sold to over 6,000 customers across c 70 markets. Headquartered in Chester in the UK, GBG has over 550 staff, operating out of 18 offices spanning the UK, Asia Pacific and the US and generates 26% of its sales internationally.

GBG markets products across six categories, which for reporting purposes are grouped into two divisions: IDS (55% of revenues FY16) and IDP (45% of revenues FY16).

Exhibit 3: Business model overview

Exhibit 4: Revenues by division FY16

Source: GBG

Source: GBG

Exhibit 3: Business model overview

Source: GBG

Exhibit 4: Revenues by division FY16

Source: GBG


Exhibit 5: Historic revenue growth

Exhibit 6: Historic EBITA and EPS growth

Source: GBG

Source: GBG


Exhibit 5: Historic revenue growth

Source: GBG

Exhibit 6: Historic EBITA and EPS growth

Source: GBG

Exhibit 7: Financial summary

£'000s

2014

2015

2016

2017e

2018e

2019e

March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

41,835

57,283

73,401

89,000

100,125

112,140

Cost of Sales

(14,473)

(16,448)

(17,606)

(21,332)

(23,989)

(26,854)

Gross Profit

27,362

40,835

55,795

67,668

76,136

85,286

EBITDA

 

 

7,849

11,844

14,772

17,350

20,319

23,039

Operating Profit (before amort. and except.)

7,164

10,790

13,428

15,150

17,619

20,214

Acquired intangible amortisation

(1,110)

(1,986)

(2,501)

(2,540)

(2,540)

(2,540)

Exceptionals

(1,080)

(1,629)

(94)

0

0

0

Share of associate

(159)

(10)

0

0

0

0

Share based payments

(747)

(971)

(1,245)

(1,600)

(1,700)

(1,699)

Operating Profit

4,068

6,194

9,588

11,010

13,379

15,975

Net Interest

(79)

(266)

(270)

(285)

(300)

(300)

Profit Before Tax (norm)

 

 

7,085

10,524

13,158

14,865

17,319

19,914

Profit Before Tax (FRS 3)

 

 

3,989

5,928

9,318

10,725

13,079

15,675

Tax

(474)

(1,127)

(178)

(3,270)

(3,983)

(4,779)

Profit After Tax (norm)

5,597

8,314

10,395

11,595

13,335

15,135

Profit After Tax (FRS 3)

3,515

4,801

9,140

7,455

9,095

10,896

Average Number of Shares Outstanding (m)

109.6

119.1

122.7

123.3

124.0

124.6

EPS - normalised (p)

 

 

5.1

7.0

8.5

9.4

10.8

12.1

EPS - normalised and fully diluted (p)

 

4.8

6.7

8.2

9.1

10.3

11.6

EPS - (IFRS) (p)

 

 

3.2

4.0

7.4

6.0

7.3

8.7

Dividend per share (p)

1.7

1.9

2.1

2.3

2.5

2.8

Gross Margin (%)

65.4

71.3

76.0

76.0

76.0

76.1

EBITDA Margin (%)

18.8

20.7

20.1

19.5

20.3

20.5

Operating Margin (before GW and except.) (%)

17.1

18.8

18.3

17.0

17.6

18.0

BALANCE SHEET

Fixed Assets

 

 

26,985

51,238

59,364

58,424

55,484

52,794

Intangible Assets

23,329

45,296

54,113

52,573

49,883

47,193

Tangible Assets

1,519

2,829

2,234

2,834

2,584

2,584

Other fixed assets

2,137

3,113

3,017

3,017

3,017

3,017

Current Assets

 

 

23,775

33,186

36,189

52,106

66,660

83,928

Debtors

11,929

17,408

23,774

34,450

40,304

46,914

Cash

11,846

15,778

12,415

17,657

26,355

37,015

Other

0

0

0

0

0

0

Current Liabilities

 

 

(17,861)

(30,784)

(32,559)

(41,735)

(45,389)

(50,099)

Creditors

(17,861)

(24,305)

(30,927)

(40,103)

(43,757)

(48,467)

Contingent consideration

0

(5,733)

(1,050)

(1,050)

(1,050)

(1,050)

Short term borrowings

0

(746)

(582)

(582)

(582)

(582)

Long Term Liabilities

 

 

(2,066)

(7,506)

(6,593)

(5,893)

(5,893)

(5,893)

Long term borrowings

0

(3,643)

(3,160)

(2,460)

(2,460)

(2,460)

Contingent consideration

0

(895)

0

0

0

0

Other long term liabilities

(2,066)

(2,968)

(3,433)

(3,433)

(3,433)

(3,433)

Net Assets

 

 

30,833

46,134

56,401

62,903

70,861

80,731

CASH FLOW

Operating Cash Flow

 

 

9,355

11,684

13,397

15,850

18,119

21,139

Net Interest

(79)

(266)

(282)

(285)

(300)

(300)

Tax

65

(337)

(248)

(3,270)

(3,983)

(4,779)

Capex

(1,144)

(2,011)

(1,762)

(2,700)

(2,300)

(2,300)

Acquisitions/disposals

(1,443)

(18,672)

(12,263)

(1,100)

0

0

Financing

416

10,954

790

0

0

0

Dividends

(1,632)

(1,955)

(2,277)

(2,553)

(2,837)

(3,101)

Net Cash Flow

5,538

(603)

(2,645)

5,942

8,699

10,659

Opening net debt/(cash)

 

 

(6,308)

(11,846)

(11,389)

(8,673)

(14,615)

(23,313)

HP finance leases initiated

0

0

0

0

0

0

Other

0

146

(71)

0

0

0

Closing net debt/(cash)

 

 

(11,846)

(11,389)

(8,673)

(14,615)

(23,313)

(33,973)

Source: Company data; Edison Investment Research

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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