Investments In Identity And Location Segments Will Drive Future Upsell Opportunities

Key Takeaways

• New focuses on operational efficiencies and innovation should enhance revenue growth and net margins through improved customer engagement and retention.
  
• Strategic initiatives in customer agreements and cross-sell opportunities are set to boost revenue and decrease customer churn, particularly in the Americas.
  
• Reliance on Identity and Location segments and challenges in the Fraud segment, amid market uncertainties and new investments, poses risks to earnings and margins.

Catalysts

Provides identity data intelligence products and services in the United Kingdom, the United States, Australia, and internationally.

• New focus areas such as operational efficiencies, product innovation, and customer centricity are expected to enhance GB Group's ability to sustain revenue growth, as evidenced by the progress on 4 key focus areas mentioned in the presentation. This should positively impact revenue and net margins.
  
• Improving net revenue retention (NRR) rate and strong performance in Identity and Location segments indicate a robust pipeline for future customer retention and new customer acquisition, likely driving higher future revenues.
  
• Strategic initiatives such as simplifying customer agreements and enhancing cross-sell opportunities between Identity and Location segments, evidenced by new significant customer wins, are poised to increase upsell and cross-sell opportunities, thereby positively impacting revenue and net margins.
  
• Investments in account management, particularly in the Americas, are improving customer retention and pipeline visibility, suggesting an increase in future earnings as customer churn decreases and upsell opportunities increase.
  
• Innovations like GBG GO and enhanced data insights capabilities are expected to enhance customer onboarding and operational efficiency, leading to improved consumption experience and higher revenue growth through increased customer engagement and retention.

GB Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming GB Group's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 7.2% in 3 years time.
• Analysts expect earnings to reach £24.5 million (and earnings per share of £0.08) by about April 2028, up from £8.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £15.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 56.5x on those 2028 earnings, down from 82.4x today. This future PE is greater than the current PE for the GB Software industry at 26.8x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.45%, as per the Simply Wall St company report.

GB Group Future Earnings Per Share Growth

Risks

• Continued uncertainties around the macroeconomic environment, global elections, and geopolitical instability could negatively affect future revenue growth, especially if they impact customer spending or create supply chain disruptions.
  
• Leadership changes at GBG may cause transitional challenges or strategic shifts that might not immediately translate into growth, potentially affecting net margins in the interim as new strategies are implemented.
  
• Revenue growth for the Fraud segment has declined 9% year-over-year due to timing differences in customer license renewals, which could indicate potential volatility in this revenue stream and impact overall earnings stability.
  
• Heavy reliance on major segments (Identity and Location) for revenue growth, while the Fraud segment lags, suggests a dependency that may risk overall earnings if these segments underperform in the future.
  
• Investments in new markets and technologies (e.g., Brazil and Peru’s online gaming regulation, document and biometrics capabilities) entail execution risk and could potentially lead to increased costs and lower net margins if they do not achieve anticipated returns.

Valuation

• The analysts have a consensus price target of £4.289 for GB Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £5.5, and the most bearish reporting a price target of just £3.9.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £342.1 million, earnings will come to £24.5 million, and it would be trading on a PE ratio of 56.5x, assuming you use a discount rate of 8.5%.
• Given the current share price of £2.66, the analyst price target of £4.29 is 38.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.