GB Group PCA acquisition an excellent fit Acquisition Software & comp services The acquisition of PCA Predict is an excellent fit with GB Group s (GBG) address intelligence services, adding SME reach and, combined with Matchcode360 and Loqate, providing GBG with the most complete offer in the industry. GBG has closed a 58m placing to fund the 66m acquisition (EV), which it will supplement with existing cash and debt. Despite the planned increase in investment to expand PCA outside the UK, the deal should be earnings enhancing and we upgrade our FY18 and FY19 EPS forecasts by 8.5% and 10.4%, respectively. 11 May 2017 Price 385p Market cap 585m Net cash as at 31 March 2017 5.2 Shares in issue 152m Free float 97% Code GBG Year end Revenue EBIT* PBT* EPS* (p) 03/16 73.4 13.4 13.2 8.2 2.1 47.0 0.5 03/17e 87.5** 17.0** 16.5 9.7 2.2 39.7 0.6 DPS (p) P/E (x) Yield (%) 03/18e 117.1 23.3 22.6 11.5 2.5 33.5 0.6 03/19e 133.4 27.3 26.7 13.4 2.8 28.7 0.7 Note: *EBIT, PBT and EPS (fully diluted) are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Reported in trading update. Primary exchange Secondary exchange Share price performance AIM N/A PCA adds SME reach to address intelligence services PCA Predict provides type-ahead address look-up functionality to SMEs in order to improve customer experience and conversion rates. PCA has over 9,000 SME customers to its self-serve cloud-based platform, providing a highly complementary fit to GBG s existing enterprise focused services in this area (Loqate and Matchcode360). The combined business will have the broadest offering on the market and management believes that there are other synergy opportunities from the cross sell of GBG s other services. GBG is paying net 66m for the business; a total consideration of 78m reflects 10m cash acquired with the company and 2m fees. To finance the acquisition, GBG has placed 17.1m new shares at 340p, raising 58m, and will supplement this with cash on hand and debt drawn from existing facilities. Earnings enhancing despite growth investment Management estimates the global addressable market for address intelligence services at $1bn, of which the UK is c 15%. PCA has grown its revenues at doubledigit rates over the last two years, but its customer base remains largely UK oriented. It plans to invest to enable the enlarged division to target the US and Australian markets, where it is currently under-represented. Despite this step up in investment, we expect the deal to be earnings enhancing from the first year and upgrade our FY18 and FY19 EPS by 8.5% and 10.4%, respectively. Valuation: Fairly priced GBG is paying a multiple of 14.0x EV/EBITDA and 20.3x P/E for PCA (12 months to February 2017), a full but fair price given the strategic value it brings to GBG, and still considerably below GBG s own rating. Chris Clarke, incoming CEO at GBG, is steeped in experience in this segment from his time at Experian, and we are optimistic that cross-selling opportunities and plans to invest outside the UK should ensure strong growth into the medium term. % 1m 3m 12m Abs 32.3 28.7 27.9 Rel (local) 30.9 25.4 6.7 52-week high/low 376.00p 215.00p Business description GB Group (GBG) has complementary identity data intelligence offerings of verification, capture, maintenance and analysis, enabling companies to identify and understand their customers. Next events FY results 6 June 2017 Analysts Bridie Barrett +44 (0)20 3077 5700 Dan Ridsdale +44 (0)20 3077 5729 Katherine Thompson +44 (0)20 3077 5730 tech@edisongroup.com Edison profile page GB Group is a research client of Edison Investment Research Limited
PCA Predict acquisition PCA type ahead look-up functionality PCA (derived from Post Code Anywhere) is a UK-based provider of postal address, mobile and email data cleansing and verification in order to improve the customer data entry experience and ultimately customer conversion rates. It runs a cloud-based self-serve platform for its 9,000, largely SME customer base, however it also sells into some larger accounts (for example Allianz, ASOS, Atos, Countrywide, William Hill). PCA s headquarters are in Worchester, UK, where the majority of its 50 employees are located. It also has small satellite operations in the US and Germany. Deal rationale Scale and reach: GBG s US-based Loqate has a predominantly enterprise customer base, sold via channel partners, and UK-based Matchcode also serves a largely enterprise grade customer. PCA s self-serve, cloud-based platform gives GBG reach into the SME market. Leading position: Management believes that post this acquisition, GBG will have the most complete solution in the address intelligence services market. Its largest competitors in this segment include Experian (Experian Data Quality), Informatica (Address Doctor) and to a lesser extent Google s Auto Address functionality (although this only goes as far as street level). However, these services do not have an SME capability, nor the granularity of reference data that can be offered by GBG post this acquisition. Synergies: GBG will add data access from the wider group to enhance the PCA service offer. The acquisition should also enable GBG to cross sell its other services into PCA s client base. For example, regulated customers such as lawyers or IFAs may be interested in the verification tools. The technology will be integrated with GBG Loqate and GBG Matchcode and the use of a common technology platform should enable scale benefits related to data sourcing. Expansion to the US and Australia: GBG estimates the address intelligence market is worth approximately $1bn. PCA is currently largely UK-focused. Under the GBG umbrella, management plans to introduce a common brand and add new data sources to grow its footprint in the US and Australia. Exhibit 1: PCA Predict complements Matchcode and Loqate Source: GB Group Acquisition terms and impact on forecasts The total consideration for the deal is 78m, reflecting an enterprise value of 66m, 10m cash acquired with PCA and 2m in deal fees. Of this consideration, 10m will be placed in escrow to GB Group 11 May 2017 2
cover any potential warranties, indemnities, potential competition authority reviews and other conditions. To finance the acquisition, GBG has placed 17.1m new shares at 340p (a 3.4% discount to the price on 8 May), raising 58m. The balance will be financed by existing cash reserves and borrowings of 10m under existing bank facilities. PCA reported double-digit revenue growth in FY15 (+18%) and FY17 (+16.5% for the 12 months to February) and management expects double-digit revenue growth to continue in the current year. PCA runs a self-serve cloud-based platform to customers. This means that the gross margin was approximately 10pp lower than GBG s equivalent business (due to commissions paid to channel partners, payment service providers hosting costs and scale benefits). However, as there is no direct salesforce, the operating margin (33% in FY17) is higher than GBG s. In our forecasts we reflect plans to immediately reconfigure the sales effort to enable the crossselling of GBG s services, and the investment in new reference data sources in the US and Australian markets, and consequently we expect EBIT margins to decrease to approximately 27%. We forecast PCA revenues of 14.5m (on a reported basis) in FY17 and 18.1m in FY19, which implies an average revenue growth of 16% over the period FY17 to FY19. Over time, we believe there could be scope to increase the gross margin as PCA benefits from GBG s scale in sourcing data. This would represent upside to our current margin estimates. We update our forecasts to reflect the acquisition and financing and have also taken the opportunity to update for GBG s headline FY17 revenue and EBITA figures, announced in April. Changes are summarised in Exhibit 2 and presented in full in Exhibit 3. Overall, we increase our EBITA estimates by approximately 19% in both FY18 and FY19. The dilution impact from the placing and the additional 10m of debt financing mean that at the EPS level we increase forecasts by 8.5% in FY18 and 10.4% in FY19. Exhibit 2: Summary forecast changes 000s 2017e 2018e 2019e Previous New % change Previous New % change Previous New % change Revenues 89,000 87,500-1.7 105,000 117,093 11.5 118,125 133,352 12.9 EBITA 16,574 17,000 2.6 19,600 23,300 18.9 22,900 27,300 19.2 PBT 15,917 16,500 3.7 19,008 22,550 18.6 22,308 26,700 19.7 EPS - normalised, diluted (p) 9.4 9.7 3.4 10.6 11.5 8.5 12.1 13.4 10.4 Source: Edison Investment Research GB Group 11 May 2017 3
Exhibit 3: Financial summary 000s 2014 2015 2016 2017e 2018e 2019e Year end 31 March IFRS IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 41,835 57,283 73,401 87,500 117,093 133,352 Cost of Sales (14,473) (16,448) (17,606) (11,693) (28,822) (32,798) Gross Profit 27,362 40,835 55,795 75,807 88,271 100,555 EBITDA 7,849 11,844 14,772 19,200 26,200 30,605 Operating Profit (before amort. and except.) 7,164 10,790 13,428 17,000 23,300 27,300 Acquired intangible amortisation (1,110) (1,986) (2,501) (2,540) (2,540) (2,540) Exceptionals (1,080) (1,629) (94) (1,200) (2,200) 0 Share of associate (159) (10) 0 0 0 0 Share based payments (747) (971) (1,245) (1,600) (1,750) (1,699) Operating Profit 4,068 6,194 9,588 11,660 16,810 23,061 Net Interest (79) (266) (270) (500) (750) (600) Profit Before Tax (norm) 7,085 10,524 13,158 16,500 22,550 26,700 Profit Before Tax (FRS 3) 3,989 5,928 9,318 11,160 16,060 22,461 Tax (474) (1,127) (178) (3,630) (4,961) (5,874) Profit After Tax (norm) 5,597 8,314 10,395 12,870 17,589 21,093 Profit After Tax (FRS 3) 3,515 4,801 9,140 7,530 11,099 16,587 Average Number of Shares Outstanding (m) 109.6 119.1 122.7 127.8 147.8 152.5 EPS - normalised (p) 5.1 7.0 8.5 10.1 11.9 13.8 EPS - normalised and fully diluted (p) 4.8 6.7 8.2 9.7 11.5 13.4 EPS - (IFRS) (p) 3.2 4.0 7.4 5.9 7.5 10.9 Dividend per share (p) 1.7 1.9 2.1 2.2 2.5 2.8 Gross Margin (%) 65.4 71.3 76.0 86.6 75.4 75.4 EBITDA Margin (%) 18.8 20.7 20.1 21.9 22.4 23.0 Operating Margin (before GW and except.) (%) 17.1 18.8 18.3 19.4 19.9 20.5 BALANCE SHEET Fixed Assets 26,985 51,238 59,364 94,424 165,684 162,489 Intangible Assets 23,329 45,296 54,113 88,573 159,933 157,243 Tangible Assets 1,519 2,829 2,234 2,834 2,734 2,229 Other fixed assets 2,137 3,113 3,017 3,017 3,017 3,017 Current Assets 23,775 33,186 36,189 51,945 67,339 86,202 Debtors 11,929 17,408 23,774 34,555 49,073 56,377 Cash 11,846 15,778 12,415 17,390 18,267 29,825 Other 0 0 0 0 0 0 Current Liabilities (17,861) (30,784) (32,559) (40,640) (52,158) (57,162) Creditors (17,861) (24,305) (30,927) (39,008) (50,526) (55,530) Contingent consideration 0 (5,733) (1,050) (1,050) (1,050) (1,050) Short term borrowings 0 (746) (582) (582) (582) (582) Long Term Liabilities (2,066) (7,506) (6,593) (17,751) (24,851) (20,851) Long term borrowings 0 (3,643) (3,160) (14,318) (21,418) (17,418) Contingent consideration 0 (895) 0 0 0 0 Other long term liabilities (2,066) (2,968) (3,433) (3,433) (3,433) (3,433) Net Assets 30,833 46,134 56,401 87,978 156,015 170,678 CASH FLOW Operating Cash Flow 9,355 11,684 13,397 15,300 21,000 28,305 Net Interest (79) (266) (282) (500) (750) (600) Tax 65 (337) (248) (3,630) (4,961) (5,874) Capex (1,144) (2,011) (1,762) (2,700) (2,700) (2,650) Acquisitions/disposals (1,443) (18,672) (12,263) (37,100) (74,000) 0 Financing 416 10,954 790 25,000 58,000 0 Dividends (1,632) (1,955) (2,277) (2,553) (2,812) (3,622) Net Cash Flow 5,538 (603) (2,645) (6,183) (6,223) 15,559 Opening net debt/(cash) (6,308) (11,846) (11,389) (8,673) (2,490) 3,733 HP finance leases initiated 0 0 0 0 0 0 Other 0 146 (71) 0 0 0 Closing net debt/(cash) (11,846) (11,389) (8,673) (2,490) 3,733 (11,825) Source: GB Group (historics), Edison Investment Research (forecasts) GB Group 11 May 2017 4
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