GBST: Result 2015

The market has been showing some nerves ahead of today's full-year results from GBST Holdings, with the stock slumping from its April high of $6.67 and bouncing around, sometimes quite violently, in the mid $5 range.

Such is the way when high expectations are baked into a share price – the fall can be hard if those expectations are missed, but the rewards can be bountiful if they're met.

Investors needn't have worried. GBST's UK growth engine is roaring along as hoped, or even a little better. When we initially upgraded the stock in GBST's platform for growth on 30 Mar 15 (Buy – $5.75), we penciled in $47m and $9m, respectively, in revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) for the International Wealth Management division (mostly the UK), but those numbers came in at $50.1m and $11.4m, up 41% and 74%.

The EBITDA margin for International Wealth Management rose from 18.5% to 22.7% during the year, although was slightly lower at 22.3% in the second half compared to 23.2% in the first. This doesn't concern us as we'd expect the margin to be lumpy due to the balance between installation and higher-margin maintenance revenues.

Asian opportunity

Management noted that work had begun with an existing client to install the company's flagship wealth management product, GBST Composer, into an Asian market. Asia may not have the UK's regulatory tailwinds but, says GBST, as wealth grows in the region, demand will increase for products to 'reach mass retail customers through digital distribution channels'. Watch this space.

GBST continues to work on Composer and during 2015 it was equipped to work on multiple databases, including Microsoft SQL Server, enabling clients to pick the best relational database for their requirements. Two clients are already using the new software and a further three are expected to go live with it by December.

There was also some good news from the international capital markets business, which increased revenue from $12.0m to $12.4m, instead of the fall to $11.0m we'd conservatively forecast. This increase was in spite of 'delays to the start of projects for Asia-based clients', so we're slightly more optimistic for the coming year. The loss here increased from $2.5m to $3.3m due to 'product investment and new market entry costs'.

There's a big opportunity here, but it's still in its early stages and we don't allow much for it in our valuation of the stock (our conservative assumptions from 30 March had it increasing revenues by 16% a year to 2020 and edging to a $1m profit).

Australia competitive

Back in Australia, the news wasn't so good, with an 'increasingly competitive market' knocking Capital Markets revenue and profits down by 1% and 2% respectively, slightly below what we'd hoped for. Australian Wealth Management was broadly in line with our expectations, with revenue growth of 4% slightly below and profit growth of 6% slightly above.

Overall, EBITDA rose 20% to $24.5m and underlying earnings per share increased 35% to 28.9 cents. As ever, cash flow was excellent, with 88% of underlying net profit converting into free cash flow, helping net cash rise to $7.6m. A final dividend of 5.5 cents will bring the yearly total to 10.5 cents fully franked, up 24% from 8.5 cents in 2014.

The stock has risen about 8% today, to $5.74, which is about 7% down from our GBST upgraded to Buy (again) on 27 Apr 2015 (Buy – $6.19), but in line with our original upgrade in GBST's platform for Growth on 30 Mar 15 (Buy – $5.75). BUY.

Note: Our Growth and Income portfolios own shares in GBST

Disclosure: The author owns shares in GBST.