Revenue growth of 28% and favourable product mix effects offset the impact of additional sales and product investment; as announced in April, operating profits increased 24%. Trading remains strong and we forecast acceleration in organic revenue growth in FY17. We initiate FY19 forecasts, looking for double digit EPS growth to continue. GB Group (GBG) has an excellent track record of creating value through M&A. With net cash and strong cash conversion, this could be added to by probable acquisitions.
Revenue growth of 28% comprised organic growth of 16% and 12% from the April 2015 acquisition of Loqate. Gross margins increased 4pp and benefited from several factors including economies on data acquisition costs and stronger growth from the higher-margin fraud services. This enabled GBG to absorb the impact of expanding its international sales efforts and investment in new products. At 18.3%, operating margins were only slightly down year on year, c 1.5pp ahead of the market’s expectations (announced in April). A dividend of 2.08p (+12%) has been announced.
FY17 has started well and with c 70% of recurring revenues and 20% of our forecast covered by deferred revenues, we remain confident that our forecasts for accelerating double-digit organic growth are underpinned. In addition to expanding GBG’s six existing services, FY17 will also see first revenues from the launch of two new services: the GOV.UK/Verify platform and fraud bureaus for financial services companies in several Asian markets. Both these initiatives have the potential to make a meaningful contribution to revenues over the coming years. We make little overall change to our FY17 and FY18 forecasts and initiate an FY19 EPS of 11.6p.
GBG’s premium P/E rating of 32.4x in FY17 (March year end) is justified: organic growth prospects remain strong and, with £8.7m of net cash and a £50m revolving credit facility in place, acquisitions are likely – management has an excellent record in creating value from M&A. While there may be some nerves over the retirement of longstanding CEO, Richard Law, he plans to remain fully involved with the business until a replacement has been appointed and transitioned.