GB Group's simplification strategy reaps benefits

GB Group (GBG) is a company that has a lot going for it. Its software is used by banks, retailers, gambling sites and others both to quickly onboard customers and to verify that they are who they say they are. Its customers include such storied names as Nike, HSBC, payments group Square and FanDuel.

Despite this, the company seems to have lost its way somewhat. Its financial performance in recent years hasn’t been good enough, with the past two years marred by big writedowns in the carrying value of its assets. This year's impairment charge of £54.7mn was blamed on higher interest rates, which GB Group said pushed up the rate at which future cash flows from its US businesses are discounted.

New chief executive Dev Dhiman admitted to investors that the group hasn't been as clear in setting out its stall as it should, recalling an overheard conversation between one of the company's salespeople and a customer where the former couldn’t succinctly explain to the latter what GB Group stood for.

“I feel that complexity has become a speed bump,” he said.

The company is now tackling this. Dhiman flagged a new “elevator pitch”, which to us still sounds as though it needs to be delivered in a building of reasonable height.

Still, simplification efforts over the past year have brought tangible benefits. Adjusted operating costs have been cut by £8.8mn, with headcount reduced by 8 per cent and stronger measures put in place to manage underperformance. Spending on technology has been cut by around 14 per cent through the “strict prioritisation” of projects.

This firmer grip on costs meant it was able to eke out a 2 per cent increase in adjusted operating profit, despite a slight decline in its top line. It also meant cash generated from operations increased by around £9mn to £43.5mn, allowing it to cut net debt by £25mn to £80.9mn.

Dhiman is also predicting brighter things for the year ahead, reiterating guidance given in April that the current financial year will bring a mid-single-digit rise in sales and a high-single-digit increase in adjusted operating profit.

This more upbeat outlook has contributed to an uplift in GB Group’s share price of around 30 per cent over the past three months. The shares now trade at 20 times forecast earnings, well below their five-year average of 30 times but given the company's recent performance and the fact that it still needs to demonstrate it can improve its growth prospects, the discount seems justified. Hold.

Last IC view: Hold, 248p, 28 Nov 2024