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GBST: Growth In A Beautifully Solid Trajectory

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GBST is a good mix of steady, defensive annuity-style income and growth potential, particularly for the expansion of its international sales.

Financial services software provider GBST Holdings Limited (GBT) is one stock that certainly had a good reporting season, with net profit lifted 66% on FY14 to $10 million, on the back of a 19% rise in revenue, to a record $98.5 million.

And the share price has reflected that, up from $3.62 at the end of July to $4.07 – after touching a record high of $4.17. GBST is valued at $276 million – not bad for a company that raised $10 million when it listed, valuing it at $44 million.

GBST has been a stellar performer in recent years, generating a total return over the last 12 months of 64.6%; over the last three years, it has returned 74% a year; and over the last five years, shareholders have been rewarded to the tune of 47.2% a year.

GBST has perfectly timed its ride on the wave of change in the financial markets. It has established itself as a major technology partner for Australian and international capital market participants, as well as the broader financial services industry.

The company is organised into three divisions:

• GBST Capital Markets: through the GBST Syn~ platform, this division provides new-generation technology to process transactions in shares, derivatives, fixed income products and managed funds. In Australia, GBST also offers the GBST Shares platform, which is the country’s most widely-used middle- and back-office system.

• GBST Wealth Management: through the GBST Composer platform, this division provides funds administration and registry software to the wealth management industry in Australia and the United Kingdom. It offers an integrated system for the administration of wrap platforms, master trusts, superannuation, pensions, risk products (insurance) and debt.

• GBST Financial Services: incorporating Emu Design, this division provides independent financial data and digital agency services for interactive website design, development, hosting, e-commerce platforms and mobile and social networking solutions.

The FY14 result was driven by international growth, with the Australian revenue holding steady in what GBST described as “difficult” trading conditions. The international capital markets revenue surged 75% to $11.7 million, mainly on the back of sales of the GBST Syn~ software, which has been developed into a full suite of capital markets products that provides comprehensive functionality for all post-trade processing requirements across multiple asset classes, entities, markets and operational centres. The FY14 year saw 16 new clients go “live,” across Australia, Asia, the UK and North America, including a major deployment for one of the world’s largest banking and financial services firms, in Asia. In particular, establishing a beachhead in the US market is a critical step for GBST.

International revenue has grown three-fold since FY10 and is now running at 48% of total revenue. While GBST Syn~ was the main impetus for this, with its revenue growth up 75%, the other international flagship product – GBST Composer – was also a solid performer, lifting revenue by 40%.

About two-thirds of all revenue is now annuity-style income, from software licences.

In the wealth management division, international revenue jumped 41%, to $35.6 million, but the Australian revenue, of $18.2 million, was unchanged on FY13. GBST’s financial services division was the disappointing aspect of the result, posting a 12% drop in revenue, to $3.1 million.

GBST has been a case study of constant product expansion and growth, keeping abreast of growth in the markets it serves. When the company was established in 1984 – when it was known as Star Systems – it developed a securities broking system, which it launched in Australia and New Zealand. In 1993 the company’s securities transaction platform, GBST Shares, was launched.

GBST Shares was the first client system to be aligned with the Australian Stock Exchange’s central depository and clearing system, CHESS (Clearing House Electronic Sub-Register System), and played a major role in enabling brokers and dealers to meet the T+3 (transaction plus three days) settlement cycle. The company subsequently launched GBST Shares Global, to handle offshore trading between markets.

In 1998 a Margin Lending system was added, followed in 2000 by the GBST Cash Management Interface, to automate settlement of cash management trust (CMT) accounts with stockbrokers.

When GBST listed on the Australian Securities Exchange in 2005, it was Australia’s largest provider of securities transaction processing. In 2006 it moved into the derivatives markets, buying Palion, Australia’s leading derivatives transaction processing technology. In 2007 GBST acquired InfoComp, now GBST Wealth Management, a leading specialist provider of wealth management and client registry software in Australia and the UK. The same year, GBST Composer was launched, offering the wealth management industry a fully integrated system to administer managed funds, structured products and retirement products.

In 2008 GBST bought Coexis, for its next-generation Syn~ platform. By 2010 GBST Shares – which had passed the milestone of processing more than half of all trades on the Australian Securities Exchange (ASX) – began to be converted to Syn~. The first Australian client went live with Syn~ in 2012, and the system won its first US client in 2013.

The company has continued this pace of product investment and expansion. Last year it introduced Capital Markets Syn ~FTT, specifically designed to incorporate each country’s specific financial transaction tax (FTT) rules. In FY14, it enhanced both the GBST Shares back- and middle-office software platform and the GBST Front Office platform enhanced to support the ASX mFunds (traded managed funds) settlement service.

GBST also launched the OMS platform for derivatives processing; MarginSuite, a new risk management tool; and the first SuperStream Gateway suite for superannuation rollover and contribution transactions to go live in Australia. This service automates transactions across GBST’s networks between superannuation funds, self-managed superannuation funds (SMSFs) and the Australian Taxation Office (ATO), and is an essential component of recent Australian government regulatory changes to automate the “back office” of the financial services sector.

GBST is a good mix of steady, defensive annuity-style income and growth potential, particularly for the expansion of its international sales. The stock has become a victim of its own success: its August surge has bumped it right up against its analysts’ consensus price target, at $4.10. GBST is trading on 21 times forecast FY15 earnings and a lowly expected fully franked yield of 2.5%, but it does look capable of improving its margins and continuing its outstanding growth track record.

View More Articles By James Dunn

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au



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