GB Group’s (GBG’s) year-end trading update confirmed a strong performance in FY20, despite COVID-19 restrictions in Asia Pacific having a modest impact in Q4. Although the lockdown restrictions are boosting demand for online products and services, not all verticals are benefiting (eg travel, transport). We have revised our FY21 and FY22 forecasts to reflect lower levels of usage-based revenues and new business as well as reductions to operating costs. We estimate that the company has ample funds to manage through the disruption and in the longer-term should be a beneficiary of increasing amounts of business shifting online.
GBG expects to report FY20 revenues of £199m (+38.7% y-o-y, +10.6% organic constant currency) and EBITA of £47m, ahead of both our and consensus forecasts. This was despite revenues in Asia Pacific seeing a modest negative effect from COVID-19 restrictions since January. Net debt declined by 47% y-o-y to £35m (net debt/EBITDA 0.7x). The company has put processes in place to service customers remotely and is implementing a series of measures to control the cost base and manage cash during the crisis, including not paying a dividend for FY20.
GBG is seeing mixed performance across products, verticals and geographies. Usage-related revenues are likely to be hit by substantially weaker end-customer demand in verticals such as travel, leisure and transport and mixed levels of demand in other verticals such as gaming and ecommerce. We would also expect lower levels of new business until lockdown restrictions are lifted and customers have more visibility on their own businesses. We have reduced our forecasts to reflect a revenue decline of 12.2% in FY21 before a partial recovery to growth of 7.3% in FY22. This results in a cut to our normalised diluted EPS forecasts of 40.6% and 29.9% respectively. Despite these cuts, we continue to forecast a reduction in net debt, shifting to net cash by the end of FY22, and with access to an additional £105m of debt, the company should be well funded to weather the disruption.
Using a reverse DCF and our revised forecasts for FY21/FY22, we estimate that the share price is factoring in mid-teens revenue growth and operating margins of c 23% from FY23, at the upper end of pre-COVID-19 expectations.