GB Group PLC (LON: GBG) – Focusing on its core capabilities and expecting better FY21 results

GB Group PLC is a FTSE AIM UK 50 Index listed Company that provides a range of solutions to its clients for validating and verifying the location and identity of their customers. It enables organisations to deal with customers safely and securely by improving digital access to stay compliant and fight fraud. The Company’s core capabilities include Fraud Prevention, Identity Verification and Location Intelligence. The Company is headquartered in the United Kingdom and employs over 1,000 people across 16 countries. It caters to approximately 20,000 customers in more than 70 countries.

In June 2021, GBG expects to release its FY21 results for the year ended 31 March 2021.

 (Source: Company Presentation)

Technological Trend and Advancements

Amid Covid-19 pandemic induced restrictions, Technology has emerged as a defensive sector since the remote working environment encouraged the requirement of cloud computing, artificial intelligence, technology tools to abstain from cyber-attacks, internet-of-things, among others.

During H1 FY21, GBG extended its machine learning capabilities to determine fraud probability with greater accuracy. It also integrated several identity verification solutions by leveraging its international datasets. In US, it has increased the adoption of its IDology solution, while it has also strengthened the penetration of document and biometric capabilities in Australia and New Zealand. In the UK, the Company also launched 'Affordability Check' to support gaming operators protection. It has also bolstered a cloud-native platform to handle high demand and improve user experience.

Growth Prospects and Risk Assessment

GBG Group is likely to get benefit from strong market drivers, including increasing expectations of safe and simple online experiences, relentless e-commerce growth, digital transformation in businesses, increased fraud risk with Covid-19 indirectly, increasing compliance requirements, and increased focus on reducing cost and improving customer acquisitions. Moreover. FY21 revenue is forecasted to be better than FY20 on an underlying basis. The Group also continued to enhance product, technologies, and key data sets while it is prudently evaluating M&A opportunities, to deliver a sustainable growth to shareholders.

However, increasing incidents of cyber-attacks can put data security at risk. Also, the travel restrictions can have an impact on new business and pipeline opportunities. Similarly, lengthening of the sales cycle could have an impact on cash flows. Adjacently, increased competition can affect the Company's leadership position and its growth trajectory. 

Now we will analyse some key fundamental and shareholders statistics of GB Group PLC. 

Recent Developments

1 April 2021: GBG announced the disposal of its Employ and Comply business, which contributed nearly 3.4% of Group revenue in FY20. The business was sold to First Advantage, and the deal was in line with GBG’s strategy to focus on its core capabilities.

28 January 2021: After serving 12 years to GBG as CFO and COO, Dave John Wilson decided to step down from the Board. His position will be succeeded by David Mathew Ward, with effect from 17 May 2021.

Trading Update for the year to 31 March 2021 (as on 25 February 2021)

• On the back of strong retail share trading in the US and Europe and advanced bitcoin market activity, the Identity division got materially benefitted through January and early February. Therefore, the trading in the H2 FY21 was stronger than anticipated.
• Subsequently, FY21 revenue are projected to be at least £213 million with operating profit of over £53 million, reflecting a better financial result than the consensus expectations.

Financial and Operational Highlights (for the six months ended 30 September 2020, as on 8 December 2020)

 (Source: Company Presentation)

• As customer renewal rates remained robust, the Company delivered strong financial results in H1 FY21. The growth was also underpinned by solid performance from specific one-off customer project in the US.
• Operationally, the Company introduced new data sets in Brazil, Argentina, and UK Mobile divisions. The Company also enhanced product and date offerings.
• The Group net debt position also improved by more than £32 million since the start of FY21, with prudent cash management and high cash generation.
• During H1 FY21, revenue grew around 10%, while the profit after tax jumped 110%. Therefore, the Company declared a dividend of 3 pence per share.
• The recent investment in Credolabs shall bolster Fraud capabilities. Overall, the Company has an evolving pipeline of potential acquisitions with strong balance sheet in place.

Financial Ratios (H1 FY21)

Share Price Performance Analysis

 (Source: Refinitiv, Thomson Reuters)

On 9 April 2021, at 8:30 AM GMT, GB Group PLC’s shares were trading at GBX 902.00, up by 0.22% against the previous day closing price. Stock 52-week High and Low were GBX 999.00 and GBX 590.00, respectively.

From a technical standpoint, 100-day SMA (704.82) and 50-day EMA (798.06) seems favourable and supporting the upside potential.

In the past two years, GB Group PLC’s stock price has delivered a return of ~66.73% return as compared to ~29.08% return of the FTSE AIM UK 50 index and ~1.77% return of the FTSE All Share Software & Computer Services index, which shows that the stock has outperformed the benchmark index and benchmark sector.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

The H1 FY21 results and the latest trading update established solid business performance and confidence in the outlook. Subsequently, the Company resumed its dividend payment by announcing interim dividend per share of 3 pence. Presently, the Group has a highly cash-generative business model with improvement in net debt. It also looks forward to considering partnership and acquisition opportunities to generate accretive growth. The Company also has a diverse customer base to combat the market uncertainties. Therefore, the business is well-positioned to pursue the upcoming market opportunities.

GB Group reiterated its FY21 guidance, and therefore, revenues are forecasted to be ahead of FY20. Meanwhile, the Company is prudently managing the business and navigating through the Covid-19 uncertainties. Moreover, GBG has significant market opportunity with accelerating structural growth drivers.

 (Source: Company Presentation) 

Considering the robust financial performance, technological improvement, strong pipeline, favourable market drivers, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on GB Group PLC at the current market price of GBX 902.00 (as on 9 April 2021 at 8:30 AM GMT) with lower double-digit upside potential based on 49.46x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).  

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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