GB Group — PCA acquisition an excellent fit

TMT

GB Group

PCA acquisition an excellent fit

Acquisition

Software & comp services

11 May 2017

Price	385p
Market cap	£585m

Net cash (£m) as at 31 March 2017		5.2

Shares in issue	152m
Free float	97%
Code	GBG

Primary exchange	AIM
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	32.3	28.7	27.9
Rel (local)	30.9	25.4	6.7

52-week high/low

376.00p

215.00p

Business description

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

Next events

FY results

6 June 2017

Analysts

Bridie Barrett	+44 (0)20 3077 5700
Dan Ridsdale	+44 (0)20 3077 5729
Katherine Thompson	+44 (0)20 3077 5730

tech@edisongroup.com

Edison profile page

GB Group is a research client of Edison Investment Research Limited

The acquisition of PCA Predict is an excellent fit with GB Group’s (GBG) address intelligence services, adding SME reach and, combined with Matchcode360 and Loqate, providing GBG with the most complete offer in the industry. GBG has closed a £58m placing to fund the £66m acquisition (EV), which it will supplement with existing cash and debt. Despite the planned increase in investment to expand PCA outside the UK, the deal should be earnings enhancing and we upgrade our FY18 and FY19 EPS forecasts by 8.5% and 10.4%, respectively.

Year end	Revenue (£m)	EBIT* (£m)	PBT* (£m)	EPS* (p)	DPS (p)	P/E (x)	Yield (%)
03/16	73.4	13.4	13.2	8.2	2.1	47.0	0.5
03/17e	87.5**	17.0**	16.5	9.7	2.2	39.7	0.6
03/18e	117.1	23.3	22.6	11.5	2.5	33.5	0.6
03/19e	133.4	27.3	26.7	13.4	2.8	28.7	0.7

Note: *EBIT, PBT and EPS (fully diluted) are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Reported in trading update.

PCA adds SME reach to address intelligence services

PCA Predict provides type-ahead address look-up functionality to SMEs in order to improve customer experience and conversion rates. PCA has over 9,000 SME customers to its self-serve cloud-based platform, providing a highly complementary fit to GBG’s existing enterprise focused services in this area (Loqate and Matchcode360). The combined business will have the broadest offering on the market and management believes that there are other synergy opportunities from the cross sell of GBG’s other services. GBG is paying net £66m for the business; a total consideration of £78m reflects £10m cash acquired with the company and £2m fees. To finance the acquisition, GBG has placed 17.1m new shares at 340p, raising £58m, and will supplement this with cash on hand and debt drawn from existing facilities.

Earnings enhancing despite growth investment

Management estimates the global addressable market for address intelligence services at $1bn, of which the UK is c 15%. PCA has grown its revenues at double-digit rates over the last two years, but its customer base remains largely UK oriented. It plans to invest to enable the enlarged division to target the US and Australian markets, where it is currently under-represented. Despite this step up in investment, we expect the deal to be earnings enhancing from the first year and upgrade our FY18 and FY19 EPS by 8.5% and 10.4%, respectively.

Valuation: Fairly priced

GBG is paying a multiple of 14.0x EV/EBITDA and 20.3x P/E for PCA (12 months to February 2017), a full but fair price given the strategic value it brings to GBG, and still considerably below GBG’s own rating. Chris Clarke, incoming CEO at GBG, is steeped in experience in this segment from his time at Experian, and we are optimistic that cross-selling opportunities and plans to invest outside the UK should ensure strong growth into the medium term.

PCA Predict acquisition

PCA – type ahead look-up functionality

PCA (derived from Post Code Anywhere) is a UK-based provider of postal address, mobile and email data cleansing and verification in order to improve the customer data entry experience and ultimately customer conversion rates. It runs a cloud-based self-serve platform for its 9,000, largely SME customer base, however it also sells into some larger accounts (for example Allianz, ASOS, Atos, Countrywide, William Hill). PCA’s headquarters are in Worchester, UK, where the majority of its 50 employees are located. It also has small satellite operations in the US and Germany.

Deal rationale

Scale and reach: GBG’s US-based Loqate has a predominantly enterprise customer base, sold via channel partners, and UK-based Matchcode also serves a largely enterprise grade customer. PCA’s self-serve, cloud-based platform gives GBG reach into the SME market.

Leading position: Management believes that post this acquisition, GBG will have the most complete solution in the address intelligence services market. Its largest competitors in this segment include Experian (Experian Data Quality), Informatica (Address Doctor) and to a lesser extent Google’s Auto Address functionality (although this only goes as far as street level). However, these services do not have an SME capability, nor the granularity of reference data that can be offered by GBG post this acquisition.

Synergies: GBG will add data access from the wider group to enhance the PCA service offer. The acquisition should also enable GBG to cross sell its other services into PCA’s client base. For example, regulated customers such as lawyers or IFAs may be interested in the verification tools. The technology will be integrated with GBG Loqate and GBG Matchcode and the use of a common technology platform should enable scale benefits related to data sourcing.

Expansion to the US and Australia: GBG estimates the address intelligence market is worth approximately $1bn. PCA is currently largely UK-focused. Under the GBG umbrella, management plans to introduce a common brand and add new data sources to grow its footprint in the US and Australia.

Exhibit 1: PCA Predict complements Matchcode and Loqate

Source: GB Group

Acquisition terms and impact on forecasts

The total consideration for the deal is £78m, reflecting an enterprise value of £66m, £10m cash acquired with PCA and £2m in deal fees. Of this consideration, £10m will be placed in escrow to cover any potential warranties, indemnities, potential competition authority reviews and other conditions.

To finance the acquisition, GBG has placed 17.1m new shares at 340p (a 3.4% discount to the price on 8 May), raising £58m. The balance will be financed by existing cash reserves and borrowings of £10m under existing bank facilities.

PCA reported double-digit revenue growth in FY15 (+18%) and FY17 (+16.5% for the 12 months to February) and management expects double-digit revenue growth to continue in the current year.

PCA runs a self-serve cloud-based platform to customers. This means that the gross margin was approximately 10pp lower than GBG’s equivalent business (due to commissions paid to channel partners, payment service providers hosting costs and scale benefits). However, as there is no direct salesforce, the operating margin (33% in FY17) is higher than GBG’s.

In our forecasts we reflect plans to immediately reconfigure the sales effort to enable the cross-selling of GBG’s services, and the investment in new reference data sources in the US and Australian markets, and consequently we expect EBIT margins to decrease to approximately 27%. We forecast PCA revenues of £14.5m (on a reported basis) in FY17 and £18.1m in FY19, which implies an average revenue growth of 16% over the period FY17 to FY19. Over time, we believe there could be scope to increase the gross margin as PCA benefits from GBG’s scale in sourcing data. This would represent upside to our current margin estimates.

We update our forecasts to reflect the acquisition and financing and have also taken the opportunity to update for GBG’s headline FY17 revenue and EBITA figures, announced in April. Changes are summarised in Exhibit 2 and presented in full in Exhibit 3.

Overall, we increase our EBITA estimates by approximately 19% in both FY18 and FY19. The dilution impact from the placing and the additional £10m of debt financing mean that at the EPS level we increase forecasts by 8.5% in FY18 and 10.4% in FY19.

Exhibit 2: Summary forecast changes

£000s	2017e			2018e			2019e
£000s	Previous	New	% change	Previous	New	% change	Previous	New	% change
Revenues	89,000	87,500	-1.7	105,000	117,093	11.5	118,125	133,352	12.9
EBITA	16,574	17,000	2.6	19,600	23,300	18.9	22,900	27,300	19.2
PBT	15,917	16,500	3.7	19,008	22,550	18.6	22,308	26,700	19.7
EPS - normalised, diluted (p)	9.4	9.7	3.4	10.6	11.5	8.5	12.1	13.4	10.4

Source: Edison Investment Research

Exhibit 3: Financial summary

	£000s	2014	2015	2016	2017e	2018e	2019e
Year end 31 March		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Revenue		41,835	57,283	73,401	87,500	117,093	133,352
Cost of Sales		(14,473)	(16,448)	(17,606)	(11,693)	(28,822)	(32,798)
Gross Profit		27,362	40,835	55,795	75,807	88,271	100,555
EBITDA		7,849	11,844	14,772	19,200	26,200	30,605
Operating Profit (before amort. and except.)		7,164	10,790	13,428	17,000	23,300	27,300
Acquired intangible amortisation		(1,110)	(1,986)	(2,501)	(2,540)	(2,540)	(2,540)
Exceptionals		(1,080)	(1,629)	(94)	(1,200)	(2,200)	0
Share of associate		(159)	(10)	0	0	0	0
Share based payments		(747)	(971)	(1,245)	(1,600)	(1,750)	(1,699)
Operating Profit		4,068	6,194	9,588	11,660	16,810	23,061
Net Interest		(79)	(266)	(270)	(500)	(750)	(600)
Profit Before Tax (norm)		7,085	10,524	13,158	16,500	22,550	26,700
Profit Before Tax (FRS 3)		3,989	5,928	9,318	11,160	16,060	22,461
Tax		(474)	(1,127)	(178)	(3,630)	(4,961)	(5,874)
Profit After Tax (norm)		5,597	8,314	10,395	12,870	17,589	21,093
Profit After Tax (FRS 3)		3,515	4,801	9,140	7,530	11,099	16,587

Average Number of Shares Outstanding (m)		109.6	119.1	122.7	127.8	147.8	152.5
EPS - normalised (p)		5.1	7.0	8.5	10.1	11.9	13.8
EPS - normalised and fully diluted (p)		4.8	6.7	8.2	9.7	11.5	13.4
EPS - (IFRS) (p)		3.2	4.0	7.4	5.9	7.5	10.9
Dividend per share (p)		1.7	1.9	2.1	2.2	2.5	2.8

Gross Margin (%)		65.4	71.3	76.0	86.6	75.4	75.4
EBITDA Margin (%)		18.8	20.7	20.1	21.9	22.4	23.0
Operating Margin (before GW and except.) (%)		17.1	18.8	18.3	19.4	19.9	20.5

BALANCE SHEET
Fixed Assets		26,985	51,238	59,364	94,424	165,684	162,489
Intangible Assets		23,329	45,296	54,113	88,573	159,933	157,243
Tangible Assets		1,519	2,829	2,234	2,834	2,734	2,229
Other fixed assets		2,137	3,113	3,017	3,017	3,017	3,017
Current Assets		23,775	33,186	36,189	51,945	67,339	86,202
Debtors		11,929	17,408	23,774	34,555	49,073	56,377
Cash		11,846	15,778	12,415	17,390	18,267	29,825
Other		0	0	0	0	0	0
Current Liabilities		(17,861)	(30,784)	(32,559)	(40,640)	(52,158)	(57,162)
Creditors		(17,861)	(24,305)	(30,927)	(39,008)	(50,526)	(55,530)
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)	(17,751)	(24,851)	(20,851)
Long term borrowings		0	(3,643)	(3,160)	(14,318)	(21,418)	(17,418)
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	87,978	156,015	170,678

CASH FLOW
Operating Cash Flow		9,355	11,684	13,397	15,300	21,000	28,305
Net Interest		(79)	(266)	(282)	(500)	(750)	(600)
Tax		65	(337)	(248)	(3,630)	(4,961)	(5,874)
Capex		(1,144)	(2,011)	(1,762)	(2,700)	(2,700)	(2,650)
Acquisitions/disposals		(1,443)	(18,672)	(12,263)	(37,100)	(74,000)	0
Financing		416	10,954	790	25,000	58,000	0
Dividends		(1,632)	(1,955)	(2,277)	(2,553)	(2,812)	(3,622)
Net Cash Flow		5,538	(603)	(2,645)	(6,183)	(6,223)	15,559
Opening net debt/(cash)		(6,308)	(11,846)	(11,389)	(8,673)	(2,490)	3,733
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)	(2,490)	3,733	(11,825)

Source: GB Group (historics), Edison Investment Research (forecasts)

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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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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