Expanding eIDV in the US

GB Group 13 February 2019 Update
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GB Group

Expanding eIDV in the US

Acquisition and fund raise

Software & comp services

13 February 2019

Price

420p

Market cap

£810m

$1.285:£1

Net cash (£m) at end H119

18.6

Shares in issue (includes 39m placing shares to be issued on 14 February)

192.3m

Free float

98%

Code

GBG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(9.4)

(17.9)

9.2

Rel (local)

(11.8)

(17.9)

9.2

52-week high/low

626p

389p

Business description

GB Group is a specialist in identity data intelligence. Its products and services enable its customers to better understand and verify their customers and employees, and are used across a range of fraud, risk management, compliance and customer on-boarding services. With headquarters in the UK, it operates across 24 countries and generates more than one-third of revenues internationally.

Next events

FY19 trading update

April 2019

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Dan Ridsdale

+44 (0)20 3077 5729

GB Group is a research client of Edison Investment Research Limited

GB Group (GBG) has acquired IDology, a US identity verification business, for an enterprise value of $300m/£231m. It has placed 39m shares at 410p per share to fund £160m of the purchase price, with the remainder coming from a new credit facility. We estimate that the deal offers significant cross-selling potential and will boost GBG’s international revenues to close to 50%.

Year end

Revenue (£m)

EBIT

(£m)

PBT*
(£m)

Dil. EPS*
(p)

DPS
(p)

P/E
(x)

03/17

87.5

17.0

16.5

9.9

2.4

42.6

03/18

119.7

26.3

25.8

13.5

2.7

31.2

03/19e

137.7

27.5

26.6

13.1

3.0

32.1

03/20e

192.8

44.1

40.3

16.1

3.3

26.1

Note: *EBIT, PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Gaining a major presence in the US

The acquisition of IDology adds domestic US data sets and more than 500 customers. We estimate it will boost FY20 revenues by 19%, and eIDV divisional revenues by 52%. In H119, 36% of group revenues came from outside the UK – we estimate that this deal will push international revenues closer to 50%. IDology is significantly more profitable than GBG (EBITDA margin 42% vs GBG at 22%), and we expect this to continue to be the case even after GBG invests in additional sales capacity to maintain IDology’s mid-teens revenue growth rate. GBG expects the deal to be earnings enhancing in FY20 – we forecast 3% diluted EPS accretion.

Good strategic and cultural fit

GBG and IDology have partnered for a number of years and know each other well. The current CEO of IDology has committed to run the business for at least the next year, which should smooth the integration of the business. GBG sees good opportunities for cross-selling, in particular providing IDology’s customers with access to its non-US datasets and to Loqate, its location intelligence service.

Valuation: Premium reflects growth opportunity

At 29.2x FY19e and 18.8x FY20e EBITDA, the stock trades at a premium to the UK software sector on an EV/EBITDA and P/E basis. Looking at more directly relevant sub-sectors, including global peers, the stock trades more in line with cyber-security peers, with similar levels of forecast profitability and growth. We believe this premium rating is warranted, considering the group’s historic track record of profitable growth and strong cash generation, combined with the opportunity from structural growth in identity data intelligence services and the potential for accretive acquisitions.

Acquisition of IDology

Terms of the deal

GBG has acquired IDology, a US provider of identity verification and fraud detection services for an enterprise value of $300m/£231m. GBG will also pay $1m for $1m cash on the IDology balance sheet. The deal is being funded through a combination of debt and equity.

Debt: the company has arranged a new revolving credit facility worth £110m with a £30m accordion. It expects to use c £84m of this facility to partly fund the acquisition.

Fund raising: the company has placed shares worth £160m – 39.024m shares at 410p per share, a 3% discount to last night’s closing price. The placing shares represent 25.5% of the existing 153.1m shares outstanding.

The company expects the shares to be issued on AIM on 14 February. Around $7.5m of the consideration will be held in escrow as security for various buyer protection items.

Background on IDology

IDology (www.idology.com) is privately owned, with CEO John Dancu owning more than 50% of the shares. The company is based in Atlanta, Georgia with 70 employees. It has 500 customers and generates more than 70% of revenues from the financial services sector (in H119 GBG generated 28% of revenues from this sector). Its platform provides services in three main areas:

onboarding;

verification and set-up; and

authentication

All customers are also signed up to IDology’s fraud consortium, which shares information on fraudulent activity across its members.

Revenues are generated on a per-transaction basis, with agreed minimums. GBG and IDology have partnered in recent years, each recommending the other to multi-national customers for data sets in their respective regions. The companies have worked together with customers such as Ebay and Etsy.

Financial performance: Strong growth and margins

Exhibit 1: IDology historic financial performance

$m (US GAAP)

CY16

CY17

CY18

Revenues

28.4

33.3

38.2

Gross profit

18.4

21.8

25.3

Opex

(7.2)

(8.0)

(9.0)

EBITDA

11.2

13.8

16.3

PBT

11.1

13.7

16.2

Revenue growth

17%

15%

Gross margin

64.8%

65.5%

66.2%

EBITDA margin

39.4%

41.4%

42.7%

Source: GB Group

Based on an EV of $300m, this values IDology at 7.9x trailing sales and 18.4x trailing EBITDA. Based on our initial forecasts for the business below, this reduces to 6.6x and 17.3x respectively for FY20. This compares to GBG EV multiples of 4.0x FY20e sales and 19.3x FY20e EBITDA based on a share price of 423p before the deal being announced.

Post-acquisition plans

According to management, IDology has not invested heavily in its domestic salesforce, instead generating the impressive level of revenue growth from a high level of upselling to the existing customer base. GBG is keen to maintain the business’s strong growth rate and intends to strengthen the US sales team to accelerate new customer wins.

The CEO, John Dancu, has committed to run the acquired business for at least one year, and the rest of the senior management team will be incentivised to stay for at least two years.

GBG does not intend to combine the two platforms, instead it plans to link the two so that a customer can access data from either platform in one place.

The company sees scope for significant cross-selling from two sources:

providing international data sets to IDology’s US multi-national customer base.

adding Loqate to the front-end of the IDology platform.

The acquisition will materially increase revenues generated in the US compared to the 9% reported in FY18.

Earnings accretive in FY20

Management expects the deal to be earnings enhancing in the first full year after acquisition (FY20). We assume all IDology revenues will be included in the eIDV business line. Based on GBG management’s plans to increase sales headcount, we factor in sales growth being maintained at 15% per year but a declining EBITDA margin.

Exhibit 2: IDology forecasts

$m

FY20e

FY21e

Revenues

45.5

52.2

Gross profit

31.1

36.0

Opex

(13.7)

(17.1)

EBITDA

17.4

18.9

PBT

Rev growth

15%

15%

Gross margin

69%

69%

EBITDA margin

38.4%

36.2%

Source: Edison Investment Research

The table below contains our revised estimates and we introduce forecasts for FY21. While the net debt/EBITDA ratio at the end of FY19 looks high, this only includes 1.5 months’ EBITDA contribution from IDology. The combination of a full year EBITDA contribution and cash generation reduces the metric to 1.0x by the end of FY20.

Exhibit 3: Changes to forecasts

£m

 

FY19e

FY19e

 

 

FY20e

FY20e

 

FY21e

 

previous

new

change

 

previous

new

change

new

Revenues

136,350

137,650

1.0%

161,676

192,757

19.2%

214,322

Gross profit

102,440

104,105

1.6%

121,724

140,486

15.4%

158,436

EBITDA

29,675

30,175

1.7%

33,689

46,918

39.3%

51,429

EBITDA margin

21.8%

21.9%

0.2%

20.8%

24.3%

3.5%

24.0%

EBITA

27,000

27,500

1.9%

30,932

44,062

42.4%

48,481

EBITA margin

19.8%

20.0%

0.2%

19.1%

22.9%

3.7%

22.6%

PBT

26,431

26,638

0.8%

30,352

40,282

32.7%

45,001

EPS - normalised, diluted (p)

13.8

13.1

-5.0%

15.6

16.1

3.0%

17.9

EPS - reported (p)

5.7

3.1

-45.3%

9.5

12.2

29.4%

14.4

Net (cash)/debt

(5,697)

71,565

Nm

(23,249)

47,889

Nm

22,383

Net debt/EBITDA

N/A

2.4

N/A

1.0

0.4

Source: Edison Investment Research

Valuation

The table below shows GBG trades compared to ID management companies, identity access management software companies and more general cyber-security companies, as well as UK software peers.

Exhibit 4: Financial and valuation metrics

Rev growth (%)

EBITDA margin (%)

EBIT margin (%)

EV/Sales (x)

EV/EBITDA (x)

P/E (x)

Yr1

Yr2

Yr1

Yr2

Yr1

Yr2

Yr1

Yr2

Yr1

Yr2

Yr1

Yr2

GBG

15.0

40.0

21.9

24.3

20.0

22.9

6.4

4.6

29.2

18.8

32.1

26.1

ID Management

6.8

9.2

18.7

25.7

13.5

20.6

4.0

4.0

32.3

16.9

20.5

19.0

Identity Access Management

26.4

23.9

-16.6

-3.1

-19.7

-7.0

9.3

7.4

23.0

18.2

28.1

23.2

Cyber Security

14.4

12.6

23.1

24.6

19.1

20.5

6.0

5.3

54.6

31.7

50.5

43.5

UK Software

23.8

24.3

8.5

19.6

0.2

14.2

4.6

3.2

13.4

11.3

20.8

18.9

Source: Edison Investment Research, Thomson Eikon. Note: Prices at 11 February.

Based on the new share count and current share price of 420p, GBG is trading at a premium to the UK software sector on all metrics, reflecting its superior profitability. Looking at more directly relevant sub-sectors, including global peers, the stock trades on multiples more akin to cyber-security peers, with similar levels of profitability and growth. We believe this premium rating is warranted, considering the group’s historic track record of profitable growth and strong cash generation combined with the opportunity from structural growth in identity data intelligence services. Using a reverse DCF, we estimate that the current share price is factoring in low-double digit revenue growth and EBIT margins of 22%, in line with management’s targets for organic growth of 10%+ and AOP margins of 20%+. We expect management to continue to make accretive acquisitions to boost growth, which should provide further support to the share price.

Exhibit 5: Financial summary

£'000s

2015

2016

2017

2018

2019e

2020e

2021e

March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

57,283

73,401

87,468

119,702

137,650

192,757

214,322

Cost of Sales

(16,448)

(17,606)

(20,302)

(27,092)

(33,545)

(52,271)

(55,886)

Gross Profit

40,835

55,795

67,166

92,610

104,105

140,486

158,436

EBITDA

 

 

11,844

14,772

18,734

28,741

30,175

46,918

51,429

Operating Profit (before amort. and except.)

10,790

13,428

17,006

26,311

27,500

44,062

48,481

Acquired intangible amortisation

(1,986)

(2,501)

(4,022)

(7,885)

(8,100)

(7,300)

(6,100)

Exceptionals

(1,629)

(94)

(1,410)

(2,143)

(9,830)

0

0

Share of associate

(10)

0

0

0

0

0

0

Share based payments

(971)

(1,245)

(994)

(2,375)

(2,500)

(2,750)

(3,025)

Operating Profit

6,194

9,588

10,580

13,908

7,070

34,012

39,356

Net Interest

(266)

(270)

(498)

(508)

(863)

(3,780)

(3,480)

Profit Before Tax (norm)

 

 

10,524

13,158

16,508

25,803

26,638

40,282

45,001

Profit Before Tax (FRS 3)

 

 

5,928

9,318

10,082

13,400

6,208

30,232

35,876

Tax

(1,127)

(178)

668

(2,746)

(1,291)

(6,590)

(7,893)

Profit After Tax (norm)

8,314

10,395

13,206

20,642

21,097

31,500

35,101

Profit After Tax (FRS 3)

4,801

9,140

10,750

10,654

4,916

23,641

27,983

Average Number of Shares Outstanding (m)

119.1

122.7

131.6

150.6

157.8

193.1

193.8

EPS - normalised (p)

 

 

7.0

8.5

10.0

13.7

13.4

16.3

18.1

EPS - normalised and fully diluted (p)

 

6.7

8.2

9.9

13.5

13.1

16.1

17.9

EPS - (IFRS) (p)

 

 

4.0

7.4

8.2

7.1

3.1

12.2

14.4

Dividend per share (p)

1.9

2.1

2.4

2.7

3.0

3.3

3.8

Gross Margin (%)

71.3

76.0

76.8

77.4

75.6

72.9

73.9

EBITDA Margin (%)

20.7

20.1

21.4

24.0

21.9

24.3

24.0

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

18.8

18.3

19.4

22.0

20.0

22.9

22.6

BALANCE SHEET

Fixed Assets

 

 

51,238

59,364

105,653

170,284

416,823

409,416

403,218

Intangible Assets

45,296

54,113

98,753

161,372

406,955

398,675

391,595

Tangible Assets

2,829

2,234

2,856

4,700

5,656

6,529

7,411

Other fixed assets

3,113

3,017

4,044

4,212

4,212

4,212

4,212

Current Assets

 

 

33,186

36,189

48,914

61,121

77,744

111,141

139,737

Debtors

17,408

23,774

30,569

37,969

49,662

63,382

70,473

Cash

15,778

12,415

17,618

22,753

27,683

47,359

68,865

Other

0

0

727

399

399

399

399

Current Liabilities

 

 

(30,784)

(32,559)

(44,444)

(56,942)

(66,290)

(75,610)

(77,460)

Creditors

(24,305)

(30,927)

(36,436)

(56,100)

(65,493)

(74,813)

(76,663)

Contingent consideration

(5,733)

(1,050)

(7,122)

(45)

0

0

0

Short term borrowings

(746)

(582)

(886)

(797)

(797)

(797)

(797)

Long Term Liabilities

 

 

(7,506)

(6,593)

(15,940)

(16,711)

(106,711)

(102,711)

(98,711)

Long term borrowings

(3,643)

(3,160)

(11,499)

(8,451)

(98,451)

(94,451)

(90,451)

Contingent consideration

(895)

0

0

0

0

0

0

Other long term liabilities

(2,968)

(3,433)

(4,441)

(8,260)

(8,260)

(8,260)

(8,260)

Net Assets

 

 

46,134

56,401

94,183

157,752

321,565

342,235

366,784

CASH FLOW

Operating Cash Flow

 

 

11,684

13,397

16,305

31,620

18,045

42,518

46,188

Net Interest

(266)

(282)

(498)

(545)

(863)

(3,780)

(3,480)

Tax

(337)

(248)

(2,193)

(3,247)

(1,291)

(6,590)

(7,893)

Capex

(2,011)

(1,762)

(2,227)

(2,018)

(2,650)

(2,750)

(2,850)

Acquisitions/disposals

(18,672)

(12,263)

(36,840)

(70,363)

(254,708)

0

0

Financing

10,954

790

24,755

56,668

160,446

0

0

Dividends

(1,955)

(2,277)

(2,775)

(3,582)

(4,049)

(5,721)

(6,459)

Net Cash Flow

(603)

(2,645)

(3,473)

8,533

(85,070)

23,677

25,506

Opening net debt/(cash)

 

 

(11,846)

(11,389)

(8,673)

(5,233)

(13,505)

71,565

47,889

HP finance leases initiated

0

0

0

0

0

0

0

Other

146

(71)

33

(261)

0

0

0

Closing net debt/(cash)

 

 

(11,389)

(8,673)

(5,233)

(13,505)

71,565

47,889

22,383

Source: GB Group, 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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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