GB Group — Update 13 June 2016

TMT

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

tech@edisongroup.com

Edison profile page

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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Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). 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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

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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