GB Group: Strong Margin

GB Group has released additional trading update data for the year ending 31 March 2013. Management expects revenue to increase by 24% to £39.4m with both operating divisions contributing to this growth. Adjusted operating profit is expected to increase 49% to £5.5m, indicating strong margin growth. The November 2012 acquisition of TMG CRB is integrating well and management say it is contributing strongly. The group has renegotiated its commercial relationship with BT, which enhances margins in GB’s URU business. The balance sheet remains robust with net cash standing at £6.3m at FY13 year end (FY12: £4.8m).

DA And DS Divisions Both Showing Strong Growth
Both the DataAuthentication (DA) and DataSolutions (DS) divisions grew revenue strongly, with DA up 20% and DS up 26% on FY12. While our estimate of £40.5m FY13 revenues was not quite reached, deferred revenue invoiced under annual contracts is expected to rise by £1m to £5m. FY13 operating margin is expected to exceed our estimate by some 1.7% (14.0% vs 12.3%e). This emphasises our expectation that FY13 results will show that the group is benefiting from economies of scale. Management expects adjusted operating profit (pre-JVs/associates, interest, tax, share-based charges, amortisation of acquired intangibles and acquisition exceptional costs) to come in at c £5.5m (FY12: £3.7m), 10% higher than our £5.0m estimate.

Two Positive Contracts With Data Suppliers
Management highlights two contracts with data suppliers. The group has entered into a new contract with Equifax to initially provide UK data for the group’s new ID3 global platform, which should be strategic to the future development of this platform as the leading electronic ID verification service. In addition, the group’s commercial relationship with BT has been renegotiated and this has helped enhance margins in GB’s URU business during FY13 and should boost margins going forward.

Valuation: Raising Estimates; Upside Potential
In line with the trading update, we have increased our FY13 pre-tax estimate to £5.5m (vs £5.0m) and EPS to 4.9p (vs 4.5p). We will review our FY14 estimates when the group reports its full FY13 results in early-June. While the current share price rating continues to be somewhat higher than our selected peer comparators (see our November 2012 Update report), we believe there is upside potential as GB is well placed to grow EPS ahead of these comparators.

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