Questor: any disappointment from GB Group will be punished but risk-tolerant investors should hold on

Russ Mould 6 November 2018 • 7:00am

Australia, Sydney, Opera House and Bridge — GB Group’s £21.3m cash purchase of Vix Verity makes 'perfect strategic sense' as the deal fills out its presence in Australia and New Zealand. Questor says hold Credit: Rudi Van Starrex/Getty Images

Questor share tip: while the valuation is far from cheap, this software firm is growing and has just sealed a sensible buy

After the October stumble investors must now decide whether it is right to buy on the dips or simply take evasive action.

In the case of GB Group, the identity verification and location software expert, buying on weakness, or at least staying patient, has proved a good tactic for many years and a recent bolt-on acquisition and solid trading statement suggest that the investment case remains strong.

It is always good to see an acquisition that complements core skills and supplements existing momentum in a business. As such, GB’s £21.3m cash purchase of Vix Verity makes perfect strategic sense, as the deal fills out its presence in Australia and New Zealand. Better still, management expects the deal to start adding to group earnings very quickly.

The trading update disclosed underlying growth rates of 14pc for sales and 7pc for profits, as well as a comforting increase in the net cash pile to highlight the financial merits of GB’s strong position in the field of cybersecurity.

The only issue remains valuation. The stock trades on nearly six times sales and 35.6 times earnings, neither of which can be described as cheap. GB is therefore still best suited to growth-seeking momentum investors with a high tolerance for risk, as the lofty price tag leaves little protection in the event of any near-term disappointments.

Questor says: hold

Ticker: GBG

Share price at close: 524p

Update: Restaurant Group

How annoying. The turnaround story at Restaurant Group appeared to be gathering pace nicely, the shares were back to the 300p mark and the prospect of an unchanged dividend of 17.4p offered the prospect of a yield of nearly 6pc to provide some support to the shares.

Now we have the £357m acquisition of Wagamama to consider, funded by a combination of cash, debt, a rights issue and a dividend cut (based on the plan to make a distribution twice covered by earnings, way above the 1.3 times cover of 2017).

The appearance of the word “transformative” in the press release feels like a tacit admission that management knows it is paying up for its target. The valuation looks more realistic if targets for cost and sales synergy are met, but this cannot and should not be taken for granted by investors. Moreover, management justifies the purchase by referring to a “multi-pronged growth strategy.”

But “growth” is not a strategy. (Growth in what? Press releases? Sales? Advisers’ fees? Profit warnings?) Growth (ideally in profits and particularly in cash flow) is what results from a strategy and its effective implementation. And using acquisitions to create momentum is much riskier than using them to supplement momentum that already exists in a business.

Strategy is all about competitive position and Questor is not convinced that adding another brand or chain, no matter how popular, makes the group a better restaurateur or more attractive to diners than it was previously.

Adding to its debt pile also means that cash will be going on interest payments and not on investment in the business, reducing Restaurant Group’s scope to develop and protect its brands and their offering, while increasing risk at the same time.

We look forward to being proven wrong, but this feels like the wrong deal at the wrong time at the wrong price. It is time to cut and run.

Questor says: sell

Ticker: RTN

Share price at close: 252.8p

Read Questor’s rules of investment before you follow our tips. See Questor's tips every day at twitter.com/DTquestor

Update: TalkTalk Telecom

It is fair to say that TalkTalk Telecom has not been this column’s best idea, since early gains following our tip in February last year have long since been lost to deeper-than-expected dividend cuts and profit warnings.

But BT’s admission last week that it was losing some market share in broadband was intriguing. If TalkTalk’s own interims, due on Nov 21, show that it is winning customers over, the shares could gain some welcome traction. Don’t throw in the towel just yet.

Questor says: hold

Ticker: TALK

Share price at close: 130p