GB Group — Update 30 November 2015

TMT

GB Group

Solid growth continues; outlook positive

Interim results

Software & comp services

1 December 2015

Price	276.75p
Market cap	£341m

Net cash (£m) at 30 Sept 2015		1.2

Shares in issue	123.3m
Free float	95%
Code	GBG

Primary exchange	AIM
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	2.6	24.5	88.9
Rel (local)	2.4	22.5	94.4

52-week high/low

283.75p

146.5p

Business description

GB Group has complimentary identity (ID) intelligence offerings of verification, capture, maintenance and analysis, enabling companies to identify and understand their customers.

Next events

Preliminary results	June 2016
AGM	August 2016

Analysts

Martin Lister	+44 (0)20 3077 5700
Bridie Barrett	+44 (0)20 3077 5700

tmt@edisongroup.com

Edison profile page

GB Group is a research client of Edison Investment Research Limited

GB Group’s (GBG) H116 results show strong performance in line with the October trading update. Group revenue rose 39%, aided by organic growth of 18%, with contributions from both of the group’s business segments. Normalised operating profit was up 21% after investing c £1.3m in product and business development capabilities, and diluted EPS after our notional 21% tax charge increased 19%. Revenue from international clients continues to rise strongly, now accounting for 26% of the group’s business up from 21% in H115. The balance sheet remains solid with £1.2m net cash.

Year end	Revenue (£m)	PBT* (£m)	EPS* (p)	DPS (p)	P/E (x)	Yield (%)
03/14	41.8	7.1	4.8	1.65	57.7	0.6
03/15	57.3	10.5	6.7	1.85	41.3	0.7
03/16e	76.0	11.8	7.3	2.00	37.9	0.7
03/17e	89.0	14.7	9.1	2.20	30.4	0.8

Note: *PBT and EPS are normalised, excluding acquired intangible amortisation, associate, exceptional items and share-based payments. EPS are diluted on a notional 21% tax rate.

Strong growth in H116; FY16e and FY17e maintained

During H116, ID Solutions revenue rose 42.5% to £16.9m, including contributions from the October 2014 Transactis and April 2015 Loqate acquisitions, and ID Proofing revenue rose 35.9% to £15.4m. Normalised segmental operating profit before central costs increased 22.4%, while its operating margin declined to 15.5% (H115: 17.7%) reflecting start-up costs for the new GOV.UK Verify product, as well as international investment costs and the expected small loss from Loqate. We maintain our FY16e, which includes an increase in GOV.UK Verify costs in H216 and also maintain FY17e, when we expect EPS growth to strengthen further.

Acquisitions creating an international services group

GBG’s acquisition strategy to create a truly international services proposition to serve its customers globally is an important factor for the group’s future growth. The two most recent overseas purchases have been Australia-based anti-fraud solutions business DecTech (April 2014) and US-based provider of specialist location intelligence solutions Loqate (April 2015). Management says that it remains vigilant to further potential acquisitions that can provide opportunities to develop existing markets and enhance the group’s product portfolio.

Valuation: Growth prospects support premium rating

The increasing awareness of, and demand for, identity intelligence solutions present positive opportunities for GBG’s future growth prospects. Following the strong share price performance over the past year, the current P/E rating is significantly higher than our selected proxy comparators. However, we believe this valuation is supported by GBG being well placed to grow both its operating divisions strongly ahead of the comparator average in FY17 and beyond. This follows our expectation of a temporary profit growth rate slowdown in FY16 due to anticipated GOV.UK Verify start-up costs and international investment, including Loqate, which we anticipate to move into profitability in FY17.

Interim results for the six months to 30 September 2015

H116 results show strong performance with group revenue rising to £32.4m (H115: £23.2m), up 39%, aided by organic growth of 18%, with contributions from both the group’s business segments. Normalised operating profit (after central costs, but before acquired intangibles amortisation), which increased to £4.54m (H115: £3.75m), was up 21% after investing c £1.3m in product and business development capabilities. Our H216 estimates include a further £2.5m investment in these capabilities, thus affecting operating margins for this period.

Segmental revenue and gross margin analysis

During H116, IDS revenue rose 42.5% to £16.9m, including contributions from the October 2014 Transactis and April 2015 Loqate acquisitions, and IDP revenue rose 35.9% to £15.4m. Group gross profit margin increased significantly to 75.9% (H115: 70.7%). Our FY16 estimate anticipates an increase to 72.2% (FY15: 71.3%) implying conservatively a lower gross margin in H216.

Exhibit 1: Analysis of revenue and gross profit

£000s	H115	H215	H116	H216e	FY13	FY14	FY15	FY16e	FY17e	FY13-17e CAGR
Previously reported revenue					39,424
Revenue*
ID Proofing (IDP)	11,346	13,821	15,423	18,512	12,368	15,118	25,167	33,935	41,500	35.3%
ID Solutions (IDS)	11,886	20,230	16,945	25,120	23,976	26,717	32,116	42,065	47,500	18.6%
Total	23,232	34,051	32,368	43,632	36,344	41,835	57,283	76,000	89,000	25.1%
Gross profit	16,423	24,412	24,555	30,345	22,761	27,362	40,835	54,900	64,600	29.8%
Gross margin %	70.7	71.7	75.9	69.5	62.6	65.4	71.3	72.2	72.6

Source: GB Group, Edison Investment Research. Note: *Based on revenue under the restructured BT agreement.

Operating margin analysis

Segmental operating profit margins during FY16 are being affected in a few ways. In addition to planned investment in the group’s product and business development capabilities, the investment in the GOV.UK Verify project (for which GBG has been chosen by Royal Mail to be its ID verification partner) is likely to significantly affect IDP’s operating profit margin, while IDS’s operating profit margin is being dampened by the April 2015 acquisition of Loqate, which contributed losses of £0.17m (on revenue of £1.60m) during H116. Our estimate for H216 assumes that Loqate will approach break even, and that in FY17, it will progress to profitability, though initially at a lower margin than IDS’s historic operating margin. It should be noted that IDS’s revenue and operating profit margin have been historically higher in the second half of the group’s fiscal year.

Exhibit 2: Operating margin analysis

£000s	H115	H215	H116	H216e	FY13	FY14	FY15	FY16e	FY17e	FY13-17e CAGR
Normalised divisional operating profit *
ID Proofing (IDP)	2,049	2,255	3,219	3,323	1,359	1,594	4,304	6,542	7,200	51.7%
ID Solutions (IDS)	2,058	5,019	1,809	4,409	4,667	6,134	7,077	6,218	8,500	16.2%
Combined	4,107	7,274	5,028	7,732	6,026	7,728	11,381	12,760	15,700	27.0%
Normalised divisional operating margin * %
ID Proofing (IDP)	18.1	16.3	20.9	18.0	11.0	10.5	17.1	19.3	17.3
ID Solutions (IDS)	17.3	24.8	10.7	17.6	19.5	23.0	22.0	14.8	17.9
Combined	17.7	21.4	15.5	17.7	16.6	18.5	19.9	16.8	17.6
Central costs	(357)	(234)	(492)	(188)	(504)	(564)	(591)	(680)	(760)	10.8%
Normalised group operating profit *	3,750	7,040	4,536	7,544	5,522	7,164	10,790	12,080	14,940	28.3%
Normalised group operating margin * %	16.1	20.7	14.0	17.3	15.2	17.1	18.8	15.9	16.8

Source: GB Group, Edison Investment Research. Note: *Before acquired intangibles amortisation and based on revenue under the restructured BT agreement.

Valuation: Growth prospects support premium rating

The scope and financial impact of global fraud and cyber-crime is increasing. The requirement of organisations and governments to invest in technologies and compliance solutions to combat these issues should also increase to outpace this threat. The group has market-leading products and services that address these global issues relating to identity and fraud. Management believes that the increasing awareness of, and demand for, identity intelligence solutions present positive opportunities for the group’s growth future prospects.

There are no quoted companies that are directly comparable competitors to GBG’s businesses. Identified competitors include Acxiom (a US-quoted direct mail and marketing group); Equifax (a US-quoted global leader in information solutions for business and consumers; Callcredit Marketing Solutions (the marketing division of Callcredit Information Group, owned by GTCR, a Chicago-based private equity firm); Experian Integrated Marketing (part of the UK-quoted Experian Group, which owns 192.com, a provider of online ID verification services); Occam (unquoted database services); RAPP (an unquoted global data-driven solutions provider);and Tracesmart (acquired in April 2014 by LexisNexis Risk Solutions, a subsidiary of UK/Dutch-quoted RELX).

For our proxy comparison table we have identified a selection of companies, including the quoted holding companies listed above, that have interests in businesses with similar disciplines. While most of these companies are significantly larger, Exhibit 3 provides some benchmarks for a realistic rating that investors could attribute to GBG.

GBG has a scalable and flexible business platform, with a high proportion of revenue coming from online services. Employing a software-as-a-service and annual renewal licence model, the group has a high (c 75%) recurring and repeat revenue base. Historically, growth has been achieved organically. However, since 2009, management has completed eight acquisitions that have strengthened the group’s product offering and added increased geographic reach.

The group takes advantage of significant trading tax losses (£18.4m carried forward at 31 March 2015) that are being recognised against current profits. As shown in Exhibit 3, for comparison purposes, we continue to calculate GBG’s normalised diluted EPS on a notional 21% tax rate, despite the UK corporation tax rate reducing to 20% in FY16, as the group now has increased overseas profits taxed at a higher rate. While the current P/E rating using this measure is significantly higher than our selected proxy comparators, we believe this valuation is supported by GBG being well placed to grow both its operating divisions strongly ahead of the comparator average in FY17 and beyond. This follows our expectation of a temporary profit growth slowdown in FY16 due to anticipated GOV.UK Verify start-up costs and international investment, including Loqate, which we anticipate to move into profitability in FY17.

Exhibit 3: Proxy comparison table

		Ticker	Price p/$	Mkt Cap £m/$m	YE Hist	EV/Rev Yr 2	EV/EBITDA Yr 2	P/E** Dec16	P/E Yr 2	Yield Yr 2	Yr2/Hist EPS CAGR %
Accenture	Consultancy	ACN*	107.6	67,228	Aug-15	1.8	10.3	20.1	18.9	2.2	9.4
Acxiom	Data management	ACXM*	22.7	1,768	Mar-15	2.2	11.7	39.3	36.6	0.0	18.7
Equifax	Credit/risk analytics	EFX*	111.8	13,246	Dec-14	5.1	13.8	22.6	22.6	1.2	29.0
Experian	Information services	EXPN	1222.0	11,691	Mar-15	4.9	13.0	19.7	19.3	2.2	11.6
Fair Isaac	Credit/risk analytics	FICO*	95.2	2,959	Sep-15	3.4	12.0	29.6	23.3	0.1	24.1
RELX	Information solutions	RELX	1197.0	13,314	Dec-14	2.5	7.0	17.9	17.9	2.5	8.9
Vasco	Internet security	VDSI*	18.7	740	Dec-14	2.8	12.8	19.1	19.1	0.0	7.4
					Average	3.2	11.5	24.0	22.5	1.2	15.6
GB Group	Applied 21% tax rate	GBG	278.0	336	Mar-15	3.6	19.8	32.4	30.5	0.8	16.5
	Actual/nil tax							32.1	30.2

Source: Thomson Reuters, Edison Investment Research. Note: *US listed; **straight-line adjustment to December 2016 year end. Prices are at UK close on 27 November 2015.

Exhibit 4: Financial summary

	£'000s	2013	2014	2015	2016e	2017e
Year end 31 March
PROFIT & LOSS
Revenue		39,424	41,835	57,283	76,000	89,000
Cost of Sales		(16,663)	(14,473)	(16,448)	(21,100)	(24,400)
Gross Profit		22,761	27,362	40,835	54,900	64,600
EBITDA		6,125	7,848	11,844	13,400	16,340
Operating Profit (before *)		5,522	7,164	10,790	12,080	14,940
Acquired intangible amortisation *		(981)	(1,110)	(1,986)	(2,340)	(2,540)
Exceptionals *		(409)	(1,080)	(1,629)	(21)	0
Share of Associate *		(146)	(159)	(10)	0	0
Share Based Payments *		(488)	(747)	(971)	(1,500)	(1,600)
Operating Profit		3,498	4,068	6,194	8,219	10,800
Net Interest		(84)	(79)	(266)	(300)	(280)
Profit Before Tax (norm)		5,438	7,085	10,524	11,780	14,660
Profit Before Tax (FRS 3)		3,414	3,989	5,928	7,919	10,520
Tax		831	(474)	(1,127)	(2,400)	(2,900)
Profit After Tax (norm)		4,296	5,597	8,314	9,306	11,581
Profit After Tax (FRS3)		4,245	3,515	4,801	5,519	7,620
Dividend per share (p)		1.50	1.65	1.85	2.00	2.20

Average Number of Shares Outstanding (m)		108.3	109.6	119.1	122.6	123.3
EPS - normalised (p) on notional 21% tax		4.0	5.1	7.0	7.6	9.4
EPS - normalised fully diluted (p) on notional 21% tax		3.8	4.8	6.7	7.3	9.1
EPS - FRS 3 (p)		3.9	3.2	4.0	4.5	6.2

Gross Margin (%)		57.7%	65.4%	71.3%	72.2%	72.6%
EBITDA Margin (%)		15.5%	18.8%	20.7%	17.6%	18.4%
Operating Margin (before GW and except.) (%)		14.0%	17.1%	18.8%	15.9%	16.8%

BALANCE SHEET
Fixed Assets		26,851	26,985	51,238	62,454	60,614
Intangible assets		22,706	23,329	45,296	55,482	52,792
Tangible assets		1,188	1,519	2,829	2,859	3,709
Other fixed assets		2,957	2,137	3,113	4,113	4,113
Current Assets		17,139	23,775	33,186	27,720	36,655
Other current assets		82	0	0	0	0
Debtors		10,749	11,929	17,408	20,500	22,000
Cash		6,308	11,846	15,778	7,220	14,655
Current Liabilities		(13,575)	(17,861)	(30,784)	(31,280)	(33,475)
Creditors		(13,575)	(17,861)	(24,305)	(28,250)	(30,550)
Contingent consideration		0	0	(5,733)	(2,284)	(2,179)
Short term borrowings		0	0	(746)	(746)	(746)
Long Term Liabilities		(2,798)	(2,066)	(7,506)	(6,711)	(5,811)
Long term borrowings		0	0	(3,643)	(2,743)	(1,843)
Contingent consideration		0	0	(895)	(895)	0
Other long term liabilities		(2,798)	(2,066)	(2,968)	(3,968)	(3,968)
Net Assets		27,617	30,833	46,134	52,183	57,983

CASH FLOW
Operating Cash Flow		6,020	9,355	11,684	14,232	17,140
Net Interest		(84)	(79)	(266)	(300)	(280)
Tax		(101)	65	(337)	(2,400)	(2,900)
Capex		(903)	(1,144)	(2,011)	(2,050)	(2,100)
Acquisitions/disposals		(2,097)	(1,443)	(18,672)	(15,275)	(1,000)
Equity financing		203	416	10,954	412	0
Dividends		(1,487)	(1,632)	(1,955)	(2,277)	(2,525)
Net Cash Flow		1,551	5,538	(603)	(7,658)	8,335
Opening net debt/(cash)		(4,757)	(6,308)	(11,846)	(11,389)	(3,731)
HP finance leases initiated		0	0	0	0	0
Other		0	0	146	0	0
Closing net debt/(cash)		(6,308)	(11,846)	(11,389)	(3,731)	(12,066)

Source: Company data, Edison Investment Research.

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2015 Edison Investment Research Limited. All rights reserved. This report has been commissioned by GB Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2015. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

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

Equities

Equities by Sector

Sectors

Thematics

Latest

Inside the mind of investors: International Biotechnology Trust

Borussia Dortmund – executive interviews

UK equities: A generational opportunity?

Audiovisual

Latest

Vantage: Gresham House Energy Storage Fund – Navigating challenges in energy storage

IP Group – executive interview

Georgia Capital in 60 seconds

About Edison

About Edison

Careers

GB Group (AIM: GBG)

GB Group — Update 30 November 2015

TMT

TMT

Latest

OPAP — Winning strategy

Patria Private Equity Trust — High liquidity and solid long-term track record

MoneyHero — Emphasis on driving margin

Intralot — Continuing improvement in Q324

Picton Property Income — Delivering on key initiatives

More on GB Group

GB Group — H123 performance masks strategic progress

GB Group — FY23 outlook maintained

GB Group — Maintaining FY23 outlook

GB Group — Capitalising on recent strategic investment

Latest from the TMT sector

MoneyHero — Emphasis on driving margin

1Spatial — Wins in the utilities sector for AI-supported apps

Filtronic — Upgrading on stronger H225 expectations

Verve Group — ID-less targeting solutions

SymBio Pharmaceuticals — Update 29 November 2015

Subscribe to Edison