Australia | Jan 21 2014
-Strength in incumbency, cash flow
-Growth underpinned by access to PPSR
-New comprehensive reporting opportunity
By Eva Brocklehurst
Veda Group ((VED)) returned to familiar ASX surroundings with an IPO in December after a period of absence and brokers have taken a look at its current prospects. Veda conducts credit checks on consumer and commercial enquiries for the insurance, automotive and property sectors and provides customer data analysis for many other sectors from its long-dated, proprietary databases.
Both Citi and UBS have initiated coverage on the stock, ascribing Neutral ratings, with $1.94 and $1.95 price targets respectively. Veda's current intention is to declare an unfranked FY14 dividend of 2c per share. Citi notes the implied dividend yield may trail domestic peers in absolute terms but would be in line with, or even above, offshore peers. Citi's valuation places the stock at similar multiples to professional and business services peers with some attention to offshore comparisons, as there's a lack of directly comparable domestic operators.
The strength of the business is in incumbency but UBS hails the fact the company has not become complacent, with several significant product developments and bolt-on acquisitions implemented in recent times. The broker believes the stock offers investors good exposure to a dominant market position in consumer and commercial credit checks as well as business-to-consumer credit scoring. Cash flow conversion is strong and while capex is elevated in the short term, UBS expects this should ease back, enabling cash generation to provide scope for either bolt-on acquisitions or an increased pay-out. The pay-out ratio is currently targeting 40-60%.
There are four primary drivers of growth for Veda, in Citi's view. These are deeper products, volume growth, new comprehensive credit reporting in Australia, and acquisitions. The company is focused on expanding product offerings and also bringing new products to new sectors in Australia and New Zealand as well as offshore emerging market investments. Veda operates in the Middle East and Asia. In 2013 Cambodia improved access to credit information by establishing its first private credit bureau with Veda.
Of some concern to brokers is that Veda is heavily leveraged to the financial services sector, with at least 78% of its customers in FY13 being in a finance or finance-related industry. This creates some risk in Citi's opinion as while no single customer contributes more than 10% of revenue, the big four Australian banks collectively represent 30% of revenue. The broker also notes some potential ambiguities in reporting profitability which, as a result, can lower overall understanding of the company. Veda only discloses revenue by segment and not contributing EBITDA. Citi is concerned about a lack of insight into the margin contribution from each division, which can lead to an over-generalisation of forecasts.
The brokers note risks mainly come from adverse changes in regulations or access to data being removed, limited or compromised, as well as the usual competition from new entrants. Some of the former risks can be serious. An example UBS provides is of US credit reporting agency Equifax, which recently lost a judgment related to falsely identifying information in a consumer credit report. The consumer was awarded $18.6m as a result of the mistakes, which had prevented credit being provided from financial institutions across a number of years.
The cyclical upswing may be helpful, with mortgage credit applications experiencing a strong recovery, but non-mortgage consumer credit and commercial credit continue to be relatively weak. Hence, UBS believes Veda's growth prospects in the near term will be underpinned by identification services and access to the Personal Property Securities Register (PPSR). PPSR is the single national source of registered security interests in personal property and has new rules to help protect consumers and business manage credit risk and check interests. Veda flags an advantage in that its established search function for the register, called VedaCheck, saves customers time and money.
Another changing feature of the credit landscape has positive aspects, but also more potential competition for Veda. Australia is introducing more comprehensive credit reporting in March, as the current system only allows the collection of negative data. A number of industry participants have lobbied for changes that would facilitate a shift towards full or comprehensive credit reporting. Having insights into a customer's credit worthiness would enable business to evaluate a risk profile and provide more valuable information, according to those that are pushing for reforms. Underpinning the case is that customer payment or repayment history is a strong predictor of future behaviour. Making this data available to credit providers therefore appears compelling. Comprehensive credit reporting should provide a new avenue of growth for Veda but won't be a material opportunity until FY16, in Citi's view, as it will take time to achieve critical mass.
UBS considers the upside for the stock is predicated on the introduction of comprehensive reporting because, not only will the level of enquiries increase, but World Bank data suggests that enquiries are 90% higher in such markets, relative to negative-only reporting markets. UBS suggests one caveat that needs to be applied to that statistic is the extent of concentration in a particular market's banking sector. Nevertheless, in a local scenario where comprehensive reporting drives enquiries up by even 50% this could add $40m to the broker's revenue forecasts for Veda, at what is a high incremental margin.
On the downside a competitor like Experian, which obtains a larger contribution from business-to-consumer enquiries and reports in the UK and the US, could make hay while the sun shines in Australia. UBS notes comprehensive reporting success could be greater with new business enquiries under the expanded system rather than for existing business with established credit checks. Further comparing Veda to Experian, UBS finds Veda has substantially less direct consumer contribution to revenue. While comprehensive reporting increases awareness amongst consumers for the need to manage credit scoring and credit attributes, UBS considers it's only part of the explanation for the gap in the contribution to earnings, which is 21% for Experian versus 8% for Veda.
Veda started back in 1967 as the Credit Reference Association of Australia, listed in 1998 as Data Advantage and then merged with Baycorp in 2001. It was taken private in 2007 by Pacific Equity Partners and Merrill Lynch Global. Merrill Lynch sold its stake to Pacific Equity in 2011. Pacific Equity retains a majority shareholding. The company's main competitor in Australia is Dun & Bradstreet.
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