Comments on GB Group and Voting Suggestions

GB Group (GBG) is a provider of digital location, identity verification and fraud prevention systems. Because of the need to identify people quickly and at low cost in the digital world, it has been a great success in the last few years and has become one of the largest AIM companies. Revenue has grown from £87m to £242m in the last 5 years although profits have been less consistent. The share price peaked at about 950p last September but is now down to 390p at the time of writing, i.e. a 59% fall.

Having purchased the shares in 2011-13 I am still showing a profit but it’s rapidly disappearing although I did sell some at higher levels. This is a typical example of a small cap technology stock at present. Nobody is buying while there are some sellers even though the prospective normalised p/e is only 18 which for a profitable growth stock seems very low.

Here’s a comment from Techinvest newsletter last week on GB Group: “Good cash generation and a strong balance sheet were factors that enabled GB Group to significantly strengthen its position in the key US market through the acquisition of Acuant last November”. They tipped it as a “buy”. Perhaps there is some risk associated with the deal and there were a large number of shares issued as part of the transaction, possibly to weak holders. Readers will need to judge for themselves whether this is now cheap enough to consider buying but I think it’s worth making some comments on the voting for the Annual General Meeting on the 28th July.

This will be a hybrid Meeting using the LUMI platform for those who don’t wish to travel to Chester. That usually works well.

But not all directors are up for re-election which is best practice for all companies although not legally required. I wished to vote against the reappointment of the Remuneration Committee Chair but cannot do so. The Chairman lost my vote instead although he is being replaced in September anyway.

My main concern is the replacement of the bonus arrangements for executive directors with a new Performance Share Plan (PSP) that replaces an Annual Bonus and Share Matching Plan. The new PSP is claimed to be more aligned with majority market practice. But in essence it will permit the award of nil-cost options with performance conditions. What are the performance conditions? They do not say. But there will be a fourth KPI added to maintain a focus on ESG improvements and communication.

Without going into details this looks like another complex remuneration scheme likely to increase total director pay (the CEO earned £1.3 million last year which I consider quite enough for a middling size business (profit last year was only £15 million so the directors total pay of £3.4 million was a significant chunk of the profits).

When remuneration schemes are changed it’s usually because the directors do not think they are paid enough or the existing scheme does not produce the desired results.

I am therefore voting against resolutions 7, 8 and 9 on the agenda as well as 3, 10 and 15 (share buy-backs for this company would be very unlikely to be appropriate). I am voting against Ernst & Young as auditors after the laughable $100mn US settlement over ethics exam cheating. See FT report here: https://www.ft.com/content/2fd2a584-3e20-466b-98d7-d26a750aeb90 . It seems auditors cannot even be trusted not to cheat in exams.

I suggest other shareholders vote the same way.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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