Since hitting the ASX boards last December, Veda Group Ltd’s (ASX: VED) shares have soared 85% on their initial public offer price of $1.25, to give the group a market value close to $2 billion. It’s now 2013’s best performing IPO, ahead of other strong performers like OzForex Group Ltd (ASX: OFX), Virtus Health Ltd (ASX: VRT) and Nine Entertainment Co Holdings Ltd (ASX: NEC).
The group provides credit and analytical information on businesses and individuals to clients who use it to make decisions on credit risk, verify identities, check employee information, and undertake digital marketing strategies. Typical clients include commercial lenders of all sizes, money transfer businesses, insurance providers, government bodies, and construction and industrial service organisations among many others.
Its services can also be used for tenancy and automobile checks, property valuations, and personal credit ratings. It has profiles of over 16-million credit-active individuals with services offered to ordinary consumers and businesses alike.
In fact the company even claims its services can help prudent Australians looking for love, by suggesting they ask about a potential dinner date’s credit rating score in order to get a pre-emptive indication of how likely they’re to be picking up the bill or not.
What’s more, it suggests its credit analytics services really come into their own when a relationship blossoms and the time comes to get down to business. A common part of settling down is arranging a home loan, and lenders are unlikely to oblige if your partner has a poor credit history.
In general the group’s big advantage is that revenues are sticky and recurring with larger clients unlikely to move due to a network effect and Veda’s embedded nature. Crucially its reputation for producing the most reliable and detailed predictor data is what provides its competitive advantage.
In other words clients will pay and stick with a service that generates what they perceive as the most reliable search results, as the net benefit is less bad debts, fewer high-risk clients, and lower downstream costs. This gives revenues an economic moat and creates high entry barriers for competitors.
The vast majority of revenue is ‘click’ revenue generated by charging a fee each time a customer accesses Veda’s products through a range of electronic distribution channels. The business also benefits from scalability as it can grow revenues faster than the increase in associated operating expenses.
It sees the consumer and digital markets as high growth areas with potential for organic and acquisitive growth.
In February Veda confirmed it expects to meet prospectus forecasts for FY 2014 with a net profit of $63.9 million on revenues of $290 million, revenue was up 13.2% on the first half of FY2013 with a compound annual growth rate in revenue and EBITDA from FY2011 to FY2013 of 13.4% and 17.3% respectively.
The group forecast a dividend payout of two cents per share for the year to June 2014, putting it on a yield of 0.86% at today’s prices.
The group would appear to have a strong growth runway, structural competitive advantages, and the support of strong credit demand amidst a low rate environment. The market agrees and selling for $2.32 on a forward price-earnings of 30.5 it seems Veda’s seductive charms have won over investors.
Heavily exposed to regulatory risk, Veda may also benefit from a trend towards deregulation given the recent change in government. This is illustrated by major changes to the Australian Privacy Act 1988, which are due to come into force March 12. The legislative reforms are expected to allow it to collect and provide more data to clients, this should improve its own profitability outlook, as its value to clients will be enhanced.