Updated: Apr 30
GB Group is a British data technology firm serving global businesses with identity, fraud and location solutions. GBG’s applications allow businesses to better understand their customers, reduce compliance risks and combat fraud. GBG’s business has grown significantly over the last decade and it has been a serial acquirer of businesses within its specific niches — adding 12 companies in the last eight years. Reporting results on Thursday the 22nd for the year to 31st March, GBG seems to be in good health, aided by the global digital transformation, with growth in its business segments of 'Identity' and 'Location Intelligence' offsetting a poorer performance in 'Fraud'. Let’s take a closer look at GBG’s business to see if it is worth holding for the long term.
GBG's Business Model
To help explain GBG’s business model, I am going to give particular examples as to how businesses utilise GBG’s solutions in each segment (Identity, Location Intelligence and Fraud).
The Identity segment for GBG represents the largest business unit of the company. With 2020 revenues of £105m, the segment makes up 53% of GBG’s business. The solutions available to customers in Identity are 'Identity and Age Verification', captured by the Id3Global platform and 'Document Verification', represented by the IDscan product that allows for the digital verification of identity documents such as Drivers Licenses and Passports. Notable customers of GBG’s identity solutions include The Home Office, the British Transport Police, Barclays, Lufthansa, Europcar, Betfair and Travelex.
One of GBG’s identity customers is Pointsbet, an Australian online/app-based sports betting company that serves sports bet customers in Australia and the US. Typically, online gambling firms are highly regulated entities that need to ensure any customer signing up to their system is of the verified legal age to play. Prior to using GBG’s Id3Global solution, Pointsbet would manually verify the age and identity of customers with paper documents — a laborious, time-consuming process that was challenging both at the point of verification and in storing customer data. With GBG’s identity solution, customer identity verification is automated; by referencing a wide array of data sources (such as financial records) GBG can identify ‘...almost anyone, anywhere in the world, at any time'. Pointsbet stated that through their use of GBG, they went from 'a 7 day verification time scale to verification within 2 or 3 seconds'.
This example shows how GBG’s technologies are dramatically improving manual processes for businesses, but also improving the customer experience on respective platforms. By reducing verification time, businesses like Pointsbet are able to get their customers spending money as soon as possible, which reduces customer drop-off in the process. With online platforms needing to spend ever-increasing sums on advertising to acquire customers to their platforms, the last thing you need is a delay to purchasing activity that will result in customers forgetting to transact as this lowers revenue potential.
The Location Intelligence business trades under the name Loqate, which was already an area of competence for GBG but was significantly bolstered by the acquisition of Loqate in 2015 for $13m. The Location Intelligence business represents roughly 25% of revenues at 2020 sales of £50m. The Location Intelligence arm of the business houses solutions for address verification and capture, email verification, geocoding and data cleansing.
The primary solution within the Location Intelligence business is the address verification and capture solution from Loqate. This solution takes data from postal providers such as Royal Mail and USPS alongside mapping and geospatial data providers to accurately suggest an address based on customer location. As the customer types in an address in the checkout/delivery form, GBG’s technology will autocorrect mistakes and predictively fill in the address for the customer.
‘We know that address verification from Loqate has helped to improve the customer journey and data quality which has had a positive impact on conversion and delivery rates’
One example of using this technology is the brand Nescafe Dulce Gusto, which sells coffee machines under the De’Longhi brand. Failed deliveries not only affect brand reputation but impact profitability, as rescheduling deliveries are a costly process. Nescafe was undergoing a website re-build and chose Loqate to improve customer address capture and verification rates. With a presence in international markets, Loqate’s global data presence enables address capture and verification across borders, which was a reason for it being chosen as Nescafe’s partner of choice. Since employing Loqate’s address intelligence technology, the company has seen a notable reduction in the rate of failed deliveries and improved levels of customer conversion.
Fraud is the smallest business unit by revenue for GBG with £35.5m in revenue for 2020, which is 18% of total group revenue. GBG’s fraud solutions portfolio is vast and has many applications to suit specific business needs. The solutions enable fraud prevention, fraud analysis, fraud investigation and processing and anomalous behaviour tracking. GBG’s fraud applications are primarily used by financial services companies.
An example of GBG’s fraud prevention solution in action would be the GBG Connexus platform, which enables companies to locate and verify individuals through data from financial, business, insurance, deceased and social data. This is very useful for detecting potential fraudsters. In the case of the Lothian Pension Fund, which is a business that needs to pay pensioners on their register a monthly income, GBG’s Connexus solution was utilised to analyse the pensioner register. The Connexus solution resolved 80 specific cases by verifying the identity of a pensioner and reinstating payments that would otherwise not have been dispersed. The solution also identified 8 accounts to which the pensioner had already deceased! This saved Lothian an estimated £27,000 per annum, and in the case of reinstating pension payments, likely saved significant reputational damage.
In terms of recent performance, GBG released a glimpse of its financial results for the year to 31st March 2021 in a trading update for the 22nd of April. Revenue was up 9% for the period on an organic basis, owing to strong results in identity and location solutions. Two specific end markets have done very well this year, online gambling and eCommerce, which have both been driven by a pandemic fueled switch to online platforms. The adjusted operating margin was 24% and the group managed to swing to a net cash position of £21m from net debt of -£35m in the prior year. The Fraud business unit was the only moot point in the latest update, as it has experienced a slowdown due to reduced customer decision making and the on-site nature of many implemented solutions being access restricted during the pandemic.
Looking further back to the full year 2020, GBG delivered 39% revenue growth, with 10% on an organic basis. In 2020, the fastest growing business line was Fraud, growing 24% organically during the year.
A Deeper Look into GBG’s Acquisitions
GBG has made 12 acquisitions in the last eight years, ranging from small <£10m purchases to large +£200m purchases such as the 2019 acquisition of IDology. The table above sheds some light on the acquisitions made from 2014 and onwards to show their size, their respective business unit and how they were funded (cash, debt or new equity). Looking at the table above, you can see that GBG has opted to typically use a mix of debt issuance and equity raising to fund its acquisitions. Deals of varying sizes have been executed almost every year, with a pause for breath in 2018 & 2020 to digest recent purchases.
At first glance, observers will be able to see that transactions have been largely funded in the majority by dilutive equity placings. As you can see in the chart above, shares in issue for GB group have increased almost 80% in the years 2014 through 2020 as GBG has tapped the market for additional capital — raising the number of shares in issue from 110m to 194m. Whilst the issuance of new shares does dilute existing shareholders, shareholders are only affected if the price falls or is subdued.
Whilst the share price does not necessarily reflect the success of acquisitions, it does go some way to reflect how much the market likes/dislikes the business raising capital through equity placing. In the case of GB group, the shares have risen over 500% over the same period that shares in issue have risen just under 80%, suggesting the market has not minded GBG accessing extra capital through issuing new shares. Each equity raise has been less than 20% of total share capital and typically around 10% of shares in issue.
Whilst I would prefer GB group to pay for acquisitions out of free cash flow, like a recent business I analysed (Gamma Communications), the market has seemingly not minded GBG’s placings and dilution has been offset by good operating results and strong share price gains. I think this is a testament to GBG buying companies that will be revenue and earnings enhancing.
What is certainly encouraging is that GB group’s organic revenue growth (which excludes growth attributed from acquisitions in a given year) has averaged 12.5% in the last 5 years, owing to the fact that the underlying business, including prior year acquisitions, is growing healthily. With the exception of IDology in 2019, GBG has kept acquisitions to a relatively small size and remained focused on its three core competencies of Identity, Location and Fraud. Even with IDology being a relatively large transaction, GBG paid a net sum of 15x trailing Ebitda for IDology, which doesn’t seem an overly expensive price given the sector GBG trades in.
So to summarise acquisitions:
GBG has been a serial acquirer over the last decade.
All acquisitions are related to the core GBG competencies.
GBG uses debt and equity placings to fund purchases — more emphasis on the latter.
The market does not seem to mind GBG's modest equity placings.
GBG does have double-digit organic growth (shows ex-acquisition growth continues).
Expect more acquisitions and equity placings to continue.
Don’t expect the shares to de-rate on news of placings.
Scope For Growth
As we have seen from the segment above, GBG has and will continue to boost growth through acquisitions as part of its long term strategy. However, there are some trends at play that can allow GBG to continue organic growth in the coming years.
The major growth driver for GBG in the coming years is likely to be growth in GBG’s underlying markets. GBG is a major beneficiary of the digital transformation trend, with its three main targeted markets of Financial Services, Online Gambling and Retail all undergoing significant digitisation. Even in industries that are not undergoing a rapid transformation to the digital model, GBG’s solutions can still be utilised on the back end to streamline processes. Take the example of a nightclub utilising GB Group’s identity solutions to verify customers IDs. It is unlikely the nightclub will be going digital (although some probably tried during covid) but GBG’s applications still have a purpose to streamline an existing process. With regulatory presence ever increasing in many industries, the combined forces of regulation and digitisation will provide ample tailwinds for GBG in the coming years.
In the short term, growth can be found from the bounce-back of the fraud segment, which in 2020 was the fastest growing business unit of GBG at 24% (organic revenue growth). Due to the physical deployment of many of these fraud solutions, the reopening of GBG’s geographical locations such as the UK in the wake of the pandemic will likely provide a boost in growth from this segment.
Firstly, GBG’s acquisition strategy creates risk. Transaction values have been increasing in size, not just in nominal terms, but also relative to GBG’s enterprise value. Whilst GBG has a pretty decent track record of creating growth through these acquisitions, we cannot rule out a large ‘transformational’ deal going wrong (like so many deals billed as ‘transformational’ by management tend to do). We also cannot rule out GBG not being able to find companies to buy or companies at the right price. These factors do bring risk for investors but are somewhat mitigated by the fact that GBG has been growing pretty well in organic terms over the last few years, so could probably bide time to find the right deal, and credit must be given for GBG’s track record thus far at creating value and smooth integration of new businesses.
The second risk to investors in GBG comes in the form of the customer base it serves. Revenues are typically linked to three markets (the UK, the USA and Australia) and to a handful of sectors such as Financial Services, Online Gambling (Gaming) and Retail. With 45% of revenues derived from financial services, this is a pretty high exposure to one sector. Looking deeper into GBG’s customer base, the financial services component does include variation, from banks, payments companies, currency exchanges and financial trading platforms, which offers some diversification. The other risk posed by the customer base is the Online Gambling customer base, as (although it is likely to grow fast in the coming years with the US legalisation of online gambling) the online gambling sector is typically overshadowed by government regulation and can be at the mercy of draconian legislature that puts pressure on business models. A regulatory squeeze on the online gambling industry could cause a drag on earnings in the future.
The financial table above helps shed some light on GBG’s fundamentals throughout the five years from 2015 through to 2020. You can see the split between organic and total revenue growth where GBG has bolstered revenue growth over the years through acquisitions. GBG’s adjusted operating margin is attractive at roughly 20% over the period, improving to 24% in 2020. However, stripping out adjustments, the margin relatively halves to 11-12%. Adjustments are typically related to the amortisation of acquired intangibles. Considering acquisitions are bread and butter for GBG in pretty much every year, as an investor, I would prefer to consider these amortisations as a continual cost of doing business and would rather look to the unadjusted figure for operating profits as opposed to the adjusted figure.
Taking the unadjusted figures into account, operating margins of 11-12% are adequate but could do with improvement. Return on capital employed, on an unadjusted basis, has weakened in the years post-2018, potentially due to the large acquisition in 2019 of IDology.
The balance sheet is in good shape, supported by good recent cash generation and the equity placings that have provided capital for acquisitions as opposed to adding debt to the balance sheet.
To summarise, GBG is a business that seems to have the twin propulsion of both solid organic growth (typically 10-15%) with the added boost from sensible bolt-on acquisitions that boost growth into the 25-35% range. GBG’s acquisitions are typically paid for by equity placings, therefore, the balance sheet is relatively strong. GBG seems to be very capable of finding decent targets, but you could argue growth through acquisitions isn’t a risk-free strategy for the long term.
It is hard to compare operating numbers for GBG to other businesses, especially those that aren’t growing at a rapid pace through acquisitions, so the investment case lies in the tailwinds GBG experiences from the ongoing regulatory and digital transformation growth and the quality product suite that clearly adds value for its customer base.
Edison Research estimates suggest GBG will earn 22p per share in 2021, deriving a P/E ratio of 41 — a significant premium to the wider market. The premium is arguably justified by topline growth. However, the case for this weakens if GBG cannot find sensible acquisition targets in the future.
I am a shareholder of GBG, and I must admit, it isn’t my most comfortable holding. However, I think the risk/reward balance favours holding on to the shares to see out the digital transformation and the maturity of GB group’s quality product suite.
At the time of writing, The Twenties Trader owned shares in GB Group.
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