GB Group (LON:GBGP) reported FY19 results in line with recently upgraded estimates. It continues to deliver on its strategy to grow organic revenues at double-digit rates while delivering operating margins in excess of 20%. Recent acquisitions are performing well and helped drive the 56% growth in international revenues over the year. We make minor changes to our forecasts, resulting in small upgrades to normalised EPS estimates.
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, GB operates across 16 countries, has customers in 72 countries and generates more than 45% of revenues internationally.
FY19 results meet GBG’s growth targets
GBG reported revenue growth of 19.9% for FY19, or 11.5% on an organic constant currency basis, at the upper end of GBG’s 10–12% target organic growth range. Adjusted operating profit of £32.0m grew 22% y-o-y, with a margin of 22.3%, and normalised EPS grew 15% y-o-y. The three focus businesses grew organic revenues at rates in the mid- to high-teens and provide the engine for future growth. The company has started to pay down some of the debt put in place when IDology was acquired and finished the year with a net debt position of £66.3m. We make no material changes to our revenue or EBITA forecasts; reductions in interest expense and tax result in EPS upgrades of 2.2% in FY20 and 2.6% in FY21.
Organic growth the immediate priority
GBG’s immediate focus is on integrating recent acquisitions and capitalising on its increased presence in the US and Asia Pacific, with investment in sales and customer support. It is also investing in technology to enable the group to scale up securely and develop integrated solutions across the different product areas, with a combined Identity/Location solution the first to be launched later this year. With c £54m headroom from current debt facilities and strong cash generation leading us to forecast a net cash position by the end of FY22, the group has adequate funding to pursue additional acquisitions in the medium term.
Valuation: Profitable growth warrants premium rating
At a P/E of 35.6x FY20e and 31.8x FY21e, the stock trades at a premium to the UK software sector. Looking at more directly relevant sub-sectors, including global peers, the stock trades more in line with 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 and the potential for accretive acquisitions.
Review of FY19 results
We recently upgraded our forecasts on the back of the April trading update, factoring in better performance than originally forecast for the two recently acquired businesses (VIX Verify and IDology). Consequently, FY19 results are marginally ahead of our forecasts for revenue, adjusted operating profit (EBITA) and normalised EPS.
Group revenues increased 20% on a reported basis, 8.7% an organic reported basis and 11.5% on an adjusted organic, constant currency basis.1 Adjusted operating profit increased 22% and normalised EPS 15% over the same period. The company continues to expense R&D as incurred and highlighted an additional £5m investment during FY19 related to improving the fraud platform, moving to hosted solutions, and developing joint solutions.
Reported EPS was ahead of our forecast due to lower than expected exceptional costs. The company incurred costs of £3.75m relating to acquisitions and a further £0.26m in reorganisation costs. This compares to our forecast for exceptional costs of £9.8m which included the costs of the fundraising – costs of £3.3m were set off against the proceeds raised.
EBITDA to operating cash conversion (pre-exceptionals) was 92.7% for the year and the company expects this to be 90–95% in the future.
The company announced a dividend of 2.99p for FY19, +12.8% y-o-y.
Divisional revenue performance substantially in line
The group saw strong growth in its three main focus areas of Identity, Location and Fraud, which combined made up 79% of group revenues in FY19. Customer numbers grew from more than 17,000 to over 19,000 during the year, of which c 900 would have come from the acquisitions (assuming no customers in common); the remaining 1,100 were new customers to the group.
The largest business line, Identity, grew 37% on a reported basis and 13% on an organic, constant currency (cc) basis, after adjusting for the perpetual licence signed in FY18. Acquisitions contributed revenue of £12.0m (VIX Verify’s contribution and a month and half contribution from IDology). New customer wins include fintechs (Revolut, Coinbase) and on-demand businesses (Deliveroo) that are expanding at pace but need support with KYC processes as they sign up new customers. This is particularly true of Revolut, which has been in the press as a result of problems with its compliance procedures.
The Location business grew 17% on a reported basis, with 14% organic cc growth and a £1.4m contribution from acquisitions (the full year effect of PCA, which was acquired in May 2017). New customers in the year included Kohls, eBay (NASDAQ:EBAY), Sephora, N26 and HelloFresh.
The Fraud business (which includes Trace & Investigate) grew 14% on a reported and organic basis, with 17% organic cc growth. This business is more focused on Asia Pacific, but it also signed Discover Financial Services (NYSE:DFS), its first US customer, during the year.
The two other businesses are UK focused and saw similar performance to the prior year: Employ & Comply grew 3% in FY19 after similar growth in FY18. Engage continued to decline, down 8% after a decline of 3% in FY18 and 16% in FY17.
The Fraud, Risk & Compliance division reported adjusted operating profit of £20.4m (+28% y-o-y) and a margin of 23.3%, 30bp higher than in FY18 but slightly lower than we forecast. The Location & Customer Intelligence division reported adjusted operating profit of £12.6m (+10% y-o-y) and a margin of 22.6%, ahead of our forecast and 40bp lower than in FY18. All of the VIX revenue was reported in the Identity business, whereas we had assumed a split between Identity and Location. As the VIX operating margin was lower than the group average, this explains the difference in divisional profitability compared to our forecasts. Combined, group adjusted operating profit was marginally ahead of our forecast.
Acquisition progress
The company is pleased with the performance of both acquisitions made in FY19.
VIX Verify: since being acquired on 23 October 2018, VIX has contributed revenues of £7.67m and operating profit of £1.33m, equating to a margin of 17.4%. This compares to a margin of 3.6% for the year to 30 June 2018, highlighting that the company has managed to achieve cost synergies sooner than expected.
IDology: since being acquired on 13 February 2019, IDology has contributed revenues of £4.28m and operating profit of £1.89m, equating to an operating margin of 44.1%. This compares to an EBITDA margin of 42.7% for CY18. The integration is performing in line with management’s expectations – the integration between GBG’s location and identity solutions is going well, and proposals and customer visits are being undertaken on a joint basis where relevant.
When it acquired IDology, GBG arranged a £110m credit facility with a £30m accordion and interest payable at LIBOR plus 1.5%. By the end of FY19 it had used £85.4m of this facility, with £54m still available for future acquisitions.
Making good progress with growth strategy
The company targets double-digit organic revenue growth and adjusted operating margins of at least 20%. It achieved this in FY19 and continues to work towards these targets for FY20 and beyond. GBG needs to achieve organic growth in excess of 10% for the three focus areas to compensate for lower growth in the UK-centric businesses, such that the 10%+ organic growth rate is maintained for the group.
Key areas of strategic focus to drive this growth include:
Maximise growth internationally from the three focus areas: 45% of revenues were generated outside of the UK in FY19, up from 34% in FY18, with growth of 56% y-o-y compared to 1% growth in the UK. A full year of revenues from the IDology acquisition should take international revenues above 50% in FY20.
Optimise growth in specialist UK businesses: we expect Engage revenues to gradually decline and the other two businesses to show mid-single-digit percentage growth.
Join up GBG with customers at the centre: staff have been recruited across the group to strengthen customer support and accelerate product innovation. The goal is to provide a seamless experience no matter which products customers are using. The company will soon be launching a combined Identity/Location solution.
Use M&A to enhance capability and reach: acquisitions are considered if they add technology, geographic coverage, additional datasets and/or new customers. This was the case for the recent VIX and IDology deals, which have given GBG access to multi-national customers in North America and Asia Pacific as well as new datasets and new technology. While short term, the company is focused on integrating recent deals and we expect M&A activity to resume in the medium term.
Outlook and changes to forecasts
Trading year-to-date has been in line with management’s expectations. We make minimal changes to our revenue and adjusted operating profit forecasts. We have reduced our net interest cost forecast to reflect the reduction in debt prior to year-end and reduced our tax rate assumption from 22% to 21%.
Valuation
We compare GBG’s financial performance and valuation metrics to the median of four peer groups (averages not used as peers include many loss-making companies). GBG’s revenue growth is at the top end of the group and its operating profitability is also towards the upper end of peers. On EV and P/E multiples, GBG trades more in line with cyber security peers. We believe this premium rating is warranted, considering the group’s historic track record of profitable growth and cash generation and its high level of recurring revenues, combined with the opportunity from structural growth in identity data intelligence services.
We also perform a reverse DCF to estimate what growth rates and margins are factored into the share price. Using our explicit forecasts to FY22, a WACC of 8.4% and long-term growth of 3%, we estimate that revenue growth of 13.8% pa from FY23 to FY28 and EBITDA margins of 24% (in line with FY19) are required to support the current share price. We expect management to continue to make accretive acquisitions to boost growth, which should provide further support to the share price.
