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GB blip the investment opportunity investors have been waiting for
Thursday 27 Oct 2016 Author: Steven Frazer

We are seeing a fresh start for GB Group (GBG:AIM) and prospective investors in the stock. First, the identity security management specialist will have a new CEO from 1 April 2017 in former Experian (EXPN) executive Chris Clark, appointed to replace the retiring Richard Law, 14 years in the top job. Secondly, the shares are now cheaper than they’ve been in years, opening the door for many new investors.

GI GB GROUP 271016

That’s because of mildly disappointing growth in the first half of the year to 30 September, and a slow start on a GOV.UK Verify programme. We think the resulting sell-off is big over-reaction to a short-term blip for an otherwise excellently-placed IT security business.

In a world of increasing security threats GB is a world leader in ‘exactly the right area’ of online identity verification, says FinnCap analyst Lorne Daniel. ‘No one else does what GB does, and it is backed by macro trends,’ agrees Peel Hunt’s technology analyst Paraag Amin.

Outstanding growth

GB has been turned from a micro-cap company into a £337m-odd client partner for a host of identity checking services, including employee background searches, identity verification and wider fraud-fighting. During the past five years alone company revenues have increased by more than 130% to £73.4m for the year to 31 March 2016, on which GB turned in £13.2m pre-tax profit before one-off items.

The shares have long since reflected the dynamic growth of the business, providing shareholders with an average annual total return of 43%, according to Morningstar data. The FTSE 100 has put up 8.7%.

Short-term setback

The GOV.UK Verify programme is designed to validate citizens for online interaction with government services. Government IT projects have a nasty habit of delays and FinnCap has trimmed £4m from sales forecasts for full year 2017 and similar for 2018, but here’s the really interesting bit of the broker’s commentary. ‘We see little profit impact and make minimal changes to the earnings lines,’ which actually amounts to no change this year (9.5p), and 0.1p per share shaved off next year’s earnings per share (EPS) to 11.3p. GB is very confident that it can make up any lost margin elsewhere in the business.

Typically trading on price to earnings (PE) multiples of 30-plus, the 31 March 2018 PE is 22.4 now.

GB Goup (GBG:AIM) 253p

Stop loss: 202p

Market value: £337.8m

Prospective PE Mar 2017: 26.6

Prospective PE Mar 2018: 22.4

Prospective dividend yield:  1.4%

Analyst price target: 350p


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