Stock of the Day – Veda (SELL)
Turning our attention to Veda (VED), one of the leading Credit Bureau businesses in Australia and New Zealand, we have seen quite promising results by this Company. VED has out-rightly experienced a robust growth trajectory with healthy revenue prospects.
As reported for FY14, Company’s pro forma EBITDA was A$129m vs. prospectus forecast A$125.1m; revenue of A$302m vs. prospectus forecast A$290.0m yielding 12% yoy growth; and EBITDA margin of 42.7% which is slightly below than expected. A final dividend of 4cps has been declared by the Company. Pro Forma NPAT was A$69m vs. prospectus forecast A$63.9m. The operating cash flow has been observed as A$130m. Capex increased 56% to A$46.1m with a capex/sales ratio of 15.3%. Net Debt has been reported to be A$237m, which is below the guidance of A$287m; and pro forma cash flow has been seen to be of A$83.0m vs. prospectus forecast A$60.8m
Year on Year Results Overview (Source - Company Reports)
A bird’s eye view on VED’s divisions reflects that its Commercial Risk & Information services was the star performer with revenue of A$126m (up 13%) attributed by factors such as an enhanced penetration in the SME segment, acquisition of Corporate Scorecard, and so forth. Consumer Risk & Identity segment’s revenue was A$100m, which was up 11% attributed by performance from Fraud and Identity products and ID matrix. There was a 10% increase in revenues (A$40.7m) for the B2C & Marketing services, which is primarily driven by performances from VedaScore and Secure Sentinel solutions, and Inivio (wealth management segment). 18.3% yoy growth was seen for the International division beat owing to a favorable AUD/NZD exchange rate. Then, Click revenue grew 11.7% to A$262m. It is understood that revenues can be cyclical depending on “click revenue”, which represents ~87% of the total revenue, in view of charges imposed on a report-by-report basis.
As per VED’s outlook, FY15 guidance for “at least low double digit EBITDA growth” looks appealing. Further, FY15 revenue growth may reflect the average growth rate achieved over the past two years. Moreover, the dividend payout is to be maintained at 50-70% of NPAT and Capex/would be at FY14 rate of 15.3%.
The auxiliary brownie points for VED in FY14 have been its branching into new market segments; offering complimentary services (based on employment verification, online identification and digital marketing); and adopting diversification strategy to start paying dividends, cumulatively add to its growth. The Company has also spent on a successful IPO (expense - A$11.6 million of share based payments for both FY2014 actual and prospectus forecast).
Sources of Revenue Growth: FY2011 to FY2014 (Source – Company Reports)
Further, the Company is well supported by huge heaps of data and deep-rooted customer relations. VED has been top-notch in creating new businesses such as first-to-market carhistory.com.au. Among others, it has also launched a cyber-monitoring tool that represents the first online ID monitoring product available in Australia.
Then the transition phase of Comprehensive Credit Reporting (CCR) in Australia has already commenced with the onset of data being provided by some customers. CCR introduced in NZ in 2014, appears to be on track. However, reaping the benefits for factoring into the revenue stream would take some time.
From competitive edge standpoint, entry of a new competitor in the consumer credit bureau space remains a threat to VED, at any point in time. For instance,
Experian may gradually build-up a great market sentiment and may be approached by banks for credit report requirements; and in such case VED’s market share will surely get affected.
Veda’s Focused Strategies (Source – Company Reports)
VED is expected to maintain revenue growth during the next five years. However, the acquisition strategy should be well poised with the capital returns to shareholders, as investments for multifarious acquisitions may pose huge risk. Some examples – Having a controlling interest in Datalicious for supporting VED’s digital marketing growth strategy; Acquisition of ITM for expansion into the wealth and superannuation industries, in May 2014; and acquisition of KMS Data to support growth strategy for Inivio, in July 2014.
VED’s strong points and better growth prospects have led to EBIT margin to be 400 basis points to 35%. Nonetheless, the soft consumer application volumes and business credit demand continuously need offsetting by other positive factors before becoming a challenge for VED. It has also been reported that higher OPEX estimates including employee costs have equalized the revenue increases, in general.
Capital Expenditure (Source – Company Reports)
Considering all the above, it is still not possible to ignore certain key headwinds – significant technology and operational risks in view of type of information being stored and transmitted to numerous customers; adherence to high level of information security restrictions in view of the Privacy Act compliance obligations; changes in legal and regulatory requirements.
VED Daily Chart (Source - Thomson Reuters)
Looking at the share price scenario at large and VED possibly reaching a substantially stable peak point with other benefits coming up in the longer run, we see that the price may stabilize around the current value of A$2.40 in the near-term. We believe softer economic conditions may lead to lower credit demand and credit applications. We also see potential for value destructive acquisitions. More acquisitions have been flagged as a part of Veda’s growth strategy. Paying too much for an acquisitions, integration and acquisition indigestion are risks. Accordingly, we put our recommendation as
SELL for this stock given aforesaid threats to VED.
Note - The following stock was covered in Kalkine Daily on 25/09/2014
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