Treasure Chest | Sep 24 2015
By Greg Peel
Veda Group ((VED)) is the dominant player in consumer and commercial credit data in Australia and New Zealand. When the company listed in late 2013 brokers saw significant upside potential down the track on the adoption of comprehensive credit reporting (CCR) in the region, which in simple terms records positive credit histories as well as the negative-only histories relied on in the lending and other industries.
But it’s a very long track. When Veda reported FY15 earnings back in August, the results were in line with broker expectations but FY16 guidance fell short of Macquarie’s forecast, leading the broker to downgrade its recommendation to Neutral from Outperform.
The issue for Macquarie is that while the earnings benefits of CCR are undeniable, much investment needs to be made before a launch is possible. Hence Veda will be in spending mode for some time before such costs are reflected in earnings growth.
That said, UBS countered Macquarie’s downgrade on the same day with an upgrade to Buy from Neutral, noting a commitment to dividend policy removed uncertainty and while acknowledging the cost issue, suggested upside potential was not sufficiently priced in.
The questions of Veda’s true value has now been brought into the spotlight once more following a takeover bid for the company at $2.70 per share from US credit reporting giant Equifax, made late last week. The bid is non-binding and subject to conditions.
The price ignores the upside potential of the company, Deutsche Bank (Buy) has since suggested. For existing shareholders to give up that potential at this point it would require a more substantial premium, the broker believes.
Citi (Buy) does not rule out a counter-bid, noting not only the synergies Veda would offer an offshore suitor but the currency benefit as well.
Moelis believes the two strategic parties likely to benefit most from a transaction with Veda are Equifax and rival Experian. Neither have any great A&NZ exposure. Veda’s consumer credit business represents 33% of group sales on an A&NZ market share of 85%. Veda’s commercial bureau represents 40% of sales and is the largest broker of ASIC data in the region.
Not only could either party bring their existing credit platforms to the game, both have experience in positive credit reporting environments, Moelis notes, which is a new frontier downunder. Moelis calculates that at an offer of $2.90 per share, up from Equifax’s opening $2.70, both would achieve earnings accretion on forward estimates before any synergies are factored in.
Given both Equifax and Experian have limited existing A&NZ exposure Moelis does not see there being any issue with either the ACCC or FIRB. And the broker believes the new Turnbull government will likely be supportive of such foreign investment.
Moelis, which is not one of the eight brokers represented in the FNArena database, rates Veda as a Buy with a $2.90 target.
Database brokers are largely waiting to see how things play out from here and are holding a consensus $2.49 target, on two Buys and a Hold (Macquarie).
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