UK Edition
Cyber security specialist GB Group ticks so many boxes it feels churlish to say anything but nice things about it, especially as we can point to a 150pc-plus paper gain (with dividends on top) since our first look at the business more than five years ago.
But the valuation still looks lofty and a lot of similarly well run, well placed, well financed companies are seeing their shares struggle thanks to the one-two punch of inflation and higher bond yields and interest rates. As a result, the economic backdrop may not be conducive and it may be worth taking profits.
Granted, it can be argued that this column is behind the curve. Technology stocks have been under the cosh for some time and GB Group, whose shares closed last night at 604p, itself peaked at around 950p last autumn.
The shares are however starting to advance smartly from their spring lows, so momentum-oriented investors may well continue to enthuse, especially as last week’s full-year trading update read well and has prompted analysts to nudge up their earnings forecasts.
In addition, GB Group has a good record of organic growth and has had a knack of finding good acquisitions to supplement its underlying sales and profit momentum. In 2021, the company bought American identity verification and fraud prevention expert Acuant for just under £550m and this year GB Group has snapped up a much smaller business in New Zealand’s Cloudcheck to bolster its anti-money laundering skills.
But the strong business momentum must still be set against the valuation. The stock trades on about five times forecast sales for the year to March 2023 and about 40 times earnings, on a stated accounting basis.
The valuation looks less fearsome on an adjusted earnings basis, which takes into account the impact of amortisation of goodwill and other intangible assets resulting from acquisitions, but it is still about 30 times, according to consensus earnings forecasts.
The premium rating, relative to the wider London market, can be justified, given the net cash on the balance sheet, GB Group’s growth record and the considerable potential of its target market. And it may be that the share price slide was more the result of indigestion caused by the placing in November of 42.1m shares at 725p apiece to help fund the Acuant deal than anything else.
But the valuation leaves little room for any unexpected disappointment and history does suggest that an environment of rising interest rates can hinder the performance of even the best technology stocks. They drive up the discount rate used in discounted cash flow models and drive down the net present value of future cash flows and thus the theoretical fair value of the stock.
Time to (very reluctantly) take profits. Sell.
Questor says: sell
Ticker: GBG
Share price at close: 604p
Update: Clinigen
It is unlikely that all readers will agree with this column’s valuation-based disciplines and opinions, but our willingness to go against the consensus viewpoint and seek out potentially undervalued assets continues to deliver portfolio benefits.
Stepping in to look at GB Group in 2016 was one example, as our analysis came in the wake of a disappointing trading update, and the same formula has worked at Clinigen, whose shares ceased trading earlier this month after the closure of the 925p-a-share bid from investment firm Triton.
Shareholders should have received their cash by April 18 to lock in a 33pc capital gain from the speciality pharmaceuticals and services business first studied here in August 2020 and tipped again last summer in the wake of a profits warning that prompted the share price to collapse by a quarter in one day.
When Clinigen’s shares peaked at nearly £12 in the autumn of 2017 it put the stock on around 25 times adjusted earnings per share (and nearly 50 times stated earnings per share).
Those multiples had retreated to barely 10 and just under 22 after the trading alert and eventually caught the attention of a predator.
Job done and a healthy profit booked on the healthcare firm.
Russ Mould is investment director at AJ Bell, the stockbroker
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