GBT: Interim result 2018

GBST's first-half result hardly mentioned the elephant in the room.

The ‘elephant' is 'project E-VOLVE', GBST's 3-year, $50m research and development (R&D) project focused on improving Composer, its Wealth Management product. Whether it comes in on budget, and achieves its stated purpose of returning GBST to the forefront of the industry, remains the key point of contention for GBST shareholders.

If E-VOLVE is successful then GBST's current enterprise value to EBITDA multiple of 13 times – which uses depressed earnings weighed down by its heavy catch up R&D – is likely to look cheap.

Trouble is large-scale projects have a poor history of meeting initial targets. The Sydney Opera House stands as a constant reminder of this, costing $102m versus its $7m estimate. There's also the tendency for management to drip feed bad news over time, instead of outlining the full extent of problems immediately.

GBST's fixed R&D estimate also fails to acknowledge the many moving parts outside management's control. What if competitors increase their R&D significantly over the next few years? What if customers demand more functionality than initially expected?

The very act of publishing the forecast could also influence the actual amount too, a real-world example of George Soros' reflexivity. A $50m R&D program publically acknowledges Composer's inferiority, boosting competitors' chances of winning work, and their R&D budgets in turn, which could widen the functionality gap even further.

As for the result itself, first-half revenue declined 5.8% to $42.6m, as an improvement in international wealth management revenue wasn't enough to offset declines in Australian wealth management and capital markets.

With operating EBITDA before 'strategic investment' of $9.6m (down 25.4% over the pcp), GBST is on track, but only just, to meet its full-year guidance of $20m–25m.

Despite that, the result does little to change our view outlined in Cutting our losses on GBST. We continue to recommend you SELL.