Questor: in a growth-starved world GB Group is worth holding despite its chunky price tag

Russ Mould 5 November 2019 • 6:02am

Whitehall street sign — GB Group helps government organisations, as well as businesses, decide who to trade with and who to block in the interests of fraud prevention Credit: Dominic Lipinski/PA

Questor share tip: the firm continues to capitalise on its strong position in what is still a growth market: identity data intelligence

It is three years since this column’s first look at GB Group and even after a capital gain of 155pc there could still be more in the story for the patient, risk-tolerant investor, judging by a trading update issued late last month.

For the first half of its financial year to March 2020, the company reported that sales had increased by 64pc to £94m (with underlying growth of 18pc), adding that (adjusted) operating profit had more than doubled, thanks to strong organic progress and the acquisition of Australia’s Vix Verify Global and America’s IDology in October 2018 and February 2019 respectively.

The sales figure handily beat analysts’ forecasts and the profit number represented pretty much half of what they are expecting for the full year. This suggests that there is a good basis to their predictions of further healthy growth in the full year to March 2020 and beyond.

The update also suggested healthy free cash flow, as if to confirm that GB Group continues to capitalise on its strong position in what is still a growth market.The £1.2bn company specialises in identity data intelligence.

It provides primarily business-to-consumer customers and government organisations with information that helps them decide who to trade with and who to block in the interests of fraud prevention, and does so within a compliance-friendly platform.

The investment case continues to look robust but we do need to think hard about the valuation.

A yield of 0.6pc will not jump out at income seekers, while the forecast price-to-earnings ratio of some 36 is hardly bargain basement territory either and any profit stumbles will be severely punished. (Loyal readers will remember that we used just such a disappointment to climb aboard three years ago.)

However, GB Group could well grow into that valuation if its current earnings trajectory is maintained, and in a growth-starved world companies with profit prospects such as these are rare. It therefore deserves a premium valuation.

As a final point, the shares are not that far from the 630p mark, a level they have failed to breach on three occasions. Potential buyers may therefore prefer to wait to see if that barrier gives way this time, as a fourth failure to crack it could prompt another near-term pullback. Should 630p be overcome, the shares could be up, up and away.

The next scheduled news is the first‑half results on Nov 26.

The company’s strong competitive position, track record and long-term growth potential all mean it could appeal to risk-tolerant investors, despite the chunky price tag.

Questor says: hold

Ticker: GBG

Share price at close: 609p

Update: DS Smith

A forecast p/e ratio of barely 10 times with a 4.7pc yield suggests to this column that DS Smith, the packaging specialist, remains good value, particularly in light of last week’s reassuring trading update.

Solid volume growth and good cost control, as the FTSE 100 company gets to grips with integrating its acquisition of Europac, underpin a continuing drive to take operating margins to within a range of 10pc-12pc, compared with the 9.4pc achieved in the year to September 2018.

Read Questor’s rules of investment before you follow our tips

That should help to support profits and cash flow, the very cash flow that can both fund dividends and pay off the debt that resulted from the Europac deal. The sale of the plastics division for £400m should also bolster the balance sheet.

A slowdown in box volumes in Germany must be watched and DS Smith would not be immune if a broad economic slowdown were to take hold. But the company’s strong position in fast-moving consumer goods and ecommerce could shelter it from the worst of any storm, and the lowly valuation offers some protection too.

DS Smith remains a solid stock for income seekers in particular.

Questor says: hold

Ticker: SMDS

Share price at close: 372.1p

Russ Mould is investment director at AJ Bell, the stockbroker

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