GB Group reported strong performance in FY20 and started taking measures to preserve cash in Q420. Trading in Q121 has been mixed and while management is unwilling to provide guidance for FY21, it has confidence that in the longer term it is well positioned to benefit from the acceleration in digital transformation that should drive demand for its identity data intelligence services. We have upgraded our EPS forecasts by 5% in FY21 and 3% in FY22.
GB Group generated 10.7% organic constant currency revenue growth in FY20, with particularly strong growth from the Fraud division of 24.3%, Identity just ahead of the group average at 11.5% and Location lagging at 6.8%. EBITA of £47.9m beat our forecast and the 24.1% margin benefited from management starting to take cash preservation measures in Q420 as the threat from COVID-19 emerged. Yearend net debt of £35m (including unamortised bank fees) was 47% lower y-o-y.
As GB Group has seen mixed performance year to date, with variation by product, location and vertical, it is not in a position to give guidance for FY21. New business continues to be signed, although some sales cycles have lengthened. While the company is likely to see depressed transaction volumes this year, and to a lesser extent, weaker licence sales, the general shift in governments and corporates to provide their products and services online provides good long-term growth prospects across all three product lines. We have revised up our forecasts for FY21 and FY22 (normalised EPS up 4.7% and 3.3% respectively) and initiate a FY23 forecast for 20% EPS growth. Even with a revenue decline in FY21, we forecast net debt reducing to £13m by year-end and a net cash position by end FY22.
GBG trades at a premium to the UK software and IT services sectors and at the upper end of its ID management peer group on a P/E basis, reflecting its strong growth outlook (post COVID-19), high recurring revenues and strong balance sheet. Our reverse DCF analysis estimates the current share price is factoring in operating margins of 23% and revenue growth of c 14% per year from FY24, at the upper end of the group’s revenue and margin targets. Outside of COVID-19 recovery, triggers for upside could include successful cross-selling from recent acquisitions, adoption of GBG’s combined identity/location solution and in the medium term, accretive acquisitions.