Investors in the Australian Fund got a boost from GBST's half year results last week. GBST's Wealth division, which provides software to administer investor platforms and managed funds, continued to perform strongly with international revenues up 46% from last year. Reforms made to the UK retirement system are the key driver of this growth, forcing financial companies to enhance and upgrade their software.
Normally competition ensures you can't make out like bandits in such fortuitous circumstances, but GBST has some protection. Firstly, the research and development burden to develop this software is enormous and ongoing. GBST continues to fund R&D to the tune of 10% of revenue, and the figure is much higher if client funded R&D is included. The barriers to entry for new competitors is high.
Secondly, the existing competition – mostly in the form of private equity owned Bravura – has apparently slipped up. A few implementation projects are delayed and over-budget. That's an enormous problem for customers like banks and pension providers who have regulatory (and investor) requirements to meet. Having a sound record on delivery now affords GBST a little extra market power. It also puts them in a good position if there is to be consolidation among the software providers. The scope for cost savings is enormous and the industry leader is best placed to benefit.
Consolidation or not, profitability continues to build in this segment, and it will produce a bounty of free cash in the next decade.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.