UK Edition
Questor: a strong competitive position in a hot market – GB Group is worth holding
Questor share tip: the identity verification firm is still growing strongly, although we must keep an eye on valuations
It is more than two-and-a-half years since our first look at GB Group and, even after a capital gain of more than 120pc, there could still be more in the story if last week’s full-year results are any guide.
The Chester-based company reported a 20pc increase in sales to £143m (with underlying growth of 11pc), a 22pc increase in (adjusted) operating profit to £32m and net debt of £66m, following the acquisition in October of Australia’s Vix Verify Global and the swoop for America’s IDology in February.
Both of those deals look to neatly supplement GB Group’s strong competitive position in what is a hot market: identity data intelligence.
It provides businesses (primarily of the “business-to-consumer” type) and government organisations with the information to decide who to trade with and who to block in order to prevent fraud, and does so within a compliance-friendly platform.
Analysts expect further strong sales and profits progress in the year to March 2020, helped by full-year contributions from the recent Australian and American purchases, as well as good underlying progress.
The fundamentals therefore seem solid, although we must still address the issue of valuation. A yield of less than 1pc is unlikely to attract income seekers, although they should bear in mind that GB Group has increased its dividend every year since 2009. The stock trades on around 35 times forecast earnings for the year to March 2020 and 34 times for the following year.
This does, admittedly, price in a fair amount of good news about future growth. Should GB Group miss a beat and disappoint the shares could suffer, as they did in 2016, although this now looks like no more than the sort of speed bump that can hit young, fast-growing firms. On the other hand, if earnings momentum remains strong the shares could still offer long-term capital growth.
The company’s strong competitive position and track record suggest it could continue to appeal to risk-tolerant investors.
Questor says: hold
Ticker: GBG
Share price at close: 580p
Update: TruFin
A substantial restructuring at Aim-quoted financial services firm TruFin means that shareholders now own a stake in two businesses, a slimmed-down TruFin and Distribution Finance Capital (also on Aim under the ticker DFCH).
TruFin’s shares had ebbed following our initial look in May last year as regulators delayed granting a banking licence to DFC and this prompted the dramatic move.
TruFin has therefore demerged DFC and investors received one DFC share for every TruFin share they owned. DFC provides supply chain finance, in particular to manufacturers and their dealer networks in areas such as motorcycles, caravans, yachts and industrial kit. This is a potentially profitable niche that the big banks will not touch. The firm is not involved in the car industry.
DFC is still working with regulators with regard to a banking licence, although approval has slipped once more towards the autumn. A licence could cut funding costs and boost growth prospects for the business, which is still in the red.
DFC’s shares have got off to a good start, motoring from their 90p listing price to 125p to give the business a market value of some £133m.
TruFin has also sold its 12pc stake in peer-to-peer lender Zopa for £44.5m. This leaves it with Oxygen Finance, an early invoice payment system for local councils, and Satago, which provides working capital and cash flow management systems for small and medium-sized businesses. Both Oxygen and Satago are loss-making but have good growth potential.
The sale of Zopa means that TruFin is very liquid and management intends to return £10m in cash to investors in two tranches. The first half has just been paid and that leaves the other £5m, which equates to around 7pc of the current £76m market value, to be paid by the end of the year.
There are still plenty of risks, especially given the delay over the banking licence, but risk-tolerant investors may feel the potential rewards are worth it. Hold both TruFin and DFC.
Questor says: hold
Ticker: TRU, DFCH
Share price at close: 78p, 125p
- Read Questor’s rules of investment before you follow our tips
Russ Mould is investment director at AJ Bell, the stockbroker. For the best of the Telegraph's investment analysis, advice and expert opinion, sign up to our weekly newsletter.
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.