GB Group is focused on solutions for online transactions and enables businesses to reduce the amount of fraud that's potentially in their business. So this is all about online ID verification and fraud detection services for online transactions. For instance, if you apply for a loan or a credit card, GB Group’s systems will allow the bank to check that you are who you say you are, and it is reducing fraud in this way. Their systems will be looking at a vast range of data to carry out that service.
The business comes from humble origins, having made sales of just £7m and an operating profit of only £1m in 1999 (when it was known as PhoneLink). By 2010, that had subsequently improved to sales of £22.2m, pretax profit of £1.3m and eps of 1.8p. In FY22, these figures peaked at £242.5m, £57.1m and 20.2p, respectively. Although there has since been a short period of consolidation, GB seems to be returning to form; an in-line update on 30 January confirmed earlier progress at its interims last November (operating profit +8% to £23.9m adjusting for a large forex gain the previous year), and Investec forecasts eps of 14.6p for the year to March, rising to 17.6p in the year starting 1st April. The more bullish Stifel forecasts 15.5p and 18.8p, dropping the soon-to-be prospective PE to just 14.0, which is just one third of the peak rating of 43x it enjoyed when market conditions were stronger. Stifel’s target is 550p, double today’s price.
Shares bounce from lows
That the shares fell as low as 213p before the recent bounce had reflected fears that depressed macro conditions and continued high interest rates could hamper GB in the short-term as well as investor suspicion it overpaid for a large acquisition. Meanwhile, its record year of 2022 was boosted by one-off gains from the boom in crypto currency account verifications and the subsequent crypto crash hurt 2023 earnings. However, Bitcoin’s recent recovery to US$66,000, alongside approval of the first crypto exchange traded fund which has seen over US$7.5bn flow into it, suggests this head-wind has now turned to a tail-wind.
Going cashless a boon for GB
But I think it’s time to draw a line under that noise and look forward to the terrific structural growth drivers so helpful to GB, in particular the mass migration of cash transactions to digital / online. A recent report found that the number of UK consumers no longer using bank notes or coins has increased from just 2.9 million in 2016 to a massive 23.1 million in 2021.The pandemic has pushed at an already open door with businesses going card-only to avoid infection transmission while consumers have embraced the convenience of e-commerce. Banking trade association, UK Finance, forecasts that by 2031, notes and coins will only account for 6% of all UK payments down from 19% in 2022 while a similar story is playing out in the USA.
Huge and growing markets
Another related trend in GB’s favour is that the e-commerce share of global retail sales has increased from 7.4% in 2015 to 21% in 2023. All this bodes well for GB because the spike in online transactions has also attracted widespread criminal activity, with the US Federal Trades Commission taking 5.8 million customer complaints related to identity theft or fraud in 2021 (+17.2% year-on-year). Governments have inevitably knee jerked by introducing a wave of new legislation and regulation and one study says the global fraud detection & prevention and identity verification markets are already worth US$35.7 billion and US$9.9 billion, respectively and each are forecast to grow at a 16.8% CAGR between 2022-2030. Separately, the anti-money laundering (AML) market is projected to grow from US$3.1 billion in 2023 to US$ 6.8 billion in 2028 and GB Group supplies products and services for all three markets.
History
Established in 1989 as GB Mailing Systems to exploit the market for postcode and address information, it was acquired by Phonelink, a then-listed UK telephone data services provider, a decade later and changed its name to Telme.com in 2000 to reflect the success of an online travel ticketing business.
However, the platform for today’s success occurred first under the leadership of Richard Law (the original CFO) and then his successor Chris Clark, a former Experian executive appointed in 2017, the latter transforming it into a truly international business with a broader product range. By H1 24 the USA had become the largest region with 34% of an enlarged sales base, with APAC 19%, Europe 13% and the UK now 30%.
Acquisitions drive 11-fold eps gains
This transformation was mainly done through 15 acquisitions in the past 10 years funded by cash and heavy share issuance - shares in issue have tripled from 85.8 million in 2010 to 252 million. Important acquisitions included: Australian fraud detection firm DecTech in 2014 (£20.5m) to gain multiple bank customers; Loqate in 2015 (US$20m), which verifies customer address information and provides a Silicon Valley base; IDscan Biometrics in 2016 (£43.8m) offering biometrics solutions for rapid customer onboarding; and PCA in 2017 (£66m), a location intelligence data provider.
IDology and Acuant provide US scale
But on a far greater scale were US identity data specialists IDology for £237m in 2019 and Acuant (£554m) the following year. GBG paid 6.2x IDology’s 2018 revenue and 14.5x EBITDA but Acuant cost 12.7x trailing revenues, over twice IDology’s valuation, with the justification being added scale in the then US$1.5bn identity market, complementary product and new datasets and cross-selling opportunities. Questions may rage on whether it overpaid but the M&A led strategy as a whole has been vindicated by the amazing 11-fold, 44-fold and 11-fold increases in sales, pretax profit and eps between FY 2010-2022, while, helped by a shift in mix towards SAAS transactions (and fewer one-off license revenues), EBIT margins have soared from 5.4% in 2010 to peak at 24.3% in ‘22 before pulling back to 21.5% last year.
Three divisions
The group reports across three divisions, which contributed as follows to H1 24 revenues:
- Identity verification: £76.6m (58%)
- Location intelligence: £36.6m (28%)
- Fraud prevention: £19.2m (14%)
Identity Verification
GB’s largest division is identity verification, which operates in markets worth a massive US$17 billion and is forecast to grow at a near 27% CAGR through to 2030. This momentum comes from the fact that while online channels have transformed business growth prospects, they also burdened organisations with the need to speed up the know your customer (KYC) process, which in turn increased the risk of failing to comply with regulations such as anti-money laundering and selling age restricted goods such as gambling and video games. The financial services sector can be particularly treacherous with large penalties meted out for AML violations. At the same time, companies don’t want to risk losing new business because that on-boarding process takes too long.
Speeds up onboarding
As long term subscribers are likely aware, in the old days, opening a new share trading account was a slow and clunky affair, in which investors had to send their broker a copy of a utility bill and passport. However, GB’s Identity Verification product suite makes that process quicker and seamless with ID3 Check, launched in 2006, allowing customers to fill in their details onto a web page with the system matching them for veracity against a range of external, third party databases to confirm the customer’s identity is genuine.
Subsequent products, ID3 Global (providing overseas ID checks), which can verify the identity of more than four billion people in 60 countries and IDscan, which provides biometric and facial recognition technology, where you simply look into your computer’s camera to be verified, have broadened out the portfolio.
Financial services is the largest market across all three divisions with 40% revenues, while Retail (11%), gaming (9%) and Tech (9%) are also significant.
US$36 billion fraud prevention market
GB’s two smaller divisions, Location Intelligence and Fraud Prevention, also operate in large markets and are growing well with sales up 8.1% and 10.5%, respectively, in H1 24. Location Intelligence provides address look-up and verification, capturing and confirming addresses in online forms and checkouts as well as checking the accuracy in real time of e-mails, phones and bank details.
Meanwhile its Fraud Prevention side helps businesses know their customers and screen out fraudulent transactions, helping to prevent application fraud and detect / prevent money laundering, while minimising disruption for the customer.
It’s a huge US$36bn market for GB and the scale of the opportunity is provided by PwC’s Global Economic Crime and Fraud Survey 2022, which showed that 45-50% of organisations have reported an incident in the prior 24 months.
Value in datasets
There are four reasons why GB is a far more valuable business that the soon-to-be prospective PE rating of 14 suggests. First, over the years, it has built up access to hundreds of global data sets supplied by the credit reference agencies (CRA) such as Experian, Equifax, Callcredit, Mitex and Relx. GB has at least two suppliers in 65 countries while its reach extends to over 200 in all and it benefits from the “network” effect where the more data it has access to, the more customers it attracts and vice versa.
In the UK alone, GB has access to data sources, including government, credit, commercial and consumer, covering 90% of the population and it’s catching up in the US following the IDology and Acuant deals. Analysts believe this provides a competitive advantage over its rivals, which include private US companies Jumio, Onfido and Trulioo and UK-based Onfido.
High repeat revenue
The second reason the shares are too cheap is that 56% of its revenues are from subscriptions while a further 38% are transaction / consumption based. Much of the latter is SAAS, for example these days we all are familiar with auto completing our address when we buy something and only need to enter our postcode to get our full address details loaded onto the screen: a business pays GB’s Loquate service six pence every time and therefore can also be considered “sticky.”
Third, GB is strongly cash generative with net debt falling from £132.6m to £104.8m year-on year in H1 24, while net debt / EBITDA is forecast to fall from the current 1.1x to just 0.4x in FY’25, leaving plenty of firepower for more acquisitions.
Fourth, the group’s technology platform is both well invested and highly scalable and it won’t take much in the form of incremental revenues to drive EBIT margins towards their former highs.
Bidders sniffing at 650p
GB’s market cap is still only £664m and I can’t help thinking it could be an attractive target either for a trade buyer or private equity. Interesting to note that it was subject to a bid approach from private equity firm GTCR back in September 2022 while Advent (which bought UK air-to-air refueller Cobham for £4 billion in 2020), Permira, Hg, KKR and Cinven were also said to be “preparing bids” according to Capital.com in the immediate aftermath. During that frenzied period the price spiked to 650p and if it doesn’t re-rate soon, history could repeat itself. There is huge scarcity value to this business; I am a buyer.
