GB Group PLC

GB Group PLC (LON: GBG) is an FTSE AIM UK 50 listed Company supporting clients to validate and verify the identity & location of their customers.

On 13 June 2022, GBG expects to release its full-year results.

Investment Rationale for Valuation – Speculative Buy at GBX 506.50

• Strong Performance Ahead of Expectations: GBG demonstrated solid trading performance across all its reporting segments, and FY22 revenue and adjusted operating profit surpassed the market expectations.
• Growth Catalysts: GBG has clear growth opportunities, influenced by powerful structural drivers such as the growing risk of digital fraud, accelerating adoption of digital commerce, and increased compliance and regulatory demands.
• Acquisitive Growth Prospects: On 1 April 2022, GBG announced the acquisition of Cloudcheck for the upfront consideration of around £10 million. The transaction is expected to provide synergy in business operations along with upselling opportunities for GBG’s solutions.
• Undervalued Multiples: On a forward 12-month basis, key valuation multiples (EV/Sales, and Price/Cash Flow) are quite lower than the average of the Technology sector.

Key Risks

• Tightening of Monetary Policy: The Federal Reserve announced an 0.5% increase in interest rates on 04 May 2022. Also, the Bank of England raised the interest to 1% and gave a warning of 10% inflation.
• Decline in Profitability: In H1 FY22, GBG reported a slight decline in profit before tax, while there is a persistent risk related to Covid-19 resurgence, increased competition, loss of data systems, supply chain snags, and scalability challenges.
• Record UK Inflation: British inflation hit a 30-year high of 7% in March 2022, which may cause a further interest rate hike. It can dampen economic growth and hamper corporate profits. Moreover, the World Bank has reduced its global growth forecast for 2022 from 4.1% to 3.2%.

Pre close Trading Statement (for the year to 31 March 2022, as of 21 April 2022)

• Solid Cash Generation: GBG’s cash generation continued to be robust that helped in reducing net debt and finance the acquisition of Acuant. As of 31 March 2022, GBG's net debt was £107 million.
• Solid Margins: For FY22, GBG expects to deliver an adjusted operating profit of at least £58 million, implying the adjusted operating profit margin at the upper end of expectations of around 24%.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY23E)

*Peers: Keywords Studios PLC, Kainos Group PLC, and Aptitude Software Group PLC.

*All selected peers are LSE-Listed Companies from the Technology sector.

Conclusion

GBG demonstrated solid underlying growth and significant strategic and operational progress during FY22. It also added new technology, customers, and people through Acuant (acquisition), which is expected to enhance operating profit margins in FY23.

Based on the promising market trends, expected synergy from acquisitions, strong net cash profile, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on GB Group PLC at the closing market price of GBX 506.50 ((as of 10 May 2022) with lower double-digit upside potential based on 27.12x Price/NTM Earnings (approx.) on FY23E earnings per share (approx.).

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Note 5: Dividend Yield may vary as per the stock price movement.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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