Ozforex Group Ltd or Veda Group Ltd: Which is the better buy?

Both are priced for growth, but one looks a better prospect to me.

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Two of 2013’s most successful IPOs were Veda Group Ltd (ASX: VED) and Ozforex Group Ltd (ASX: OFX), but how does their future stack up based on current valuations?

By this March Veda’s shares had more than doubled in value to $2.50 from their December IPO price of $1.25, but they now sell for $2.08 on a PE around 27 based on projected earnings. 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. Its growth strategy is to add clients in new and existing industries that it operates in, while developing new analytical products to sell.

Veda’s reputation for providing the most complete predictor data provides its competitive advantage, as a potential client like OzForex would want the best information available to help identify its own clients for credit or fraud risks. This makes Veda’s revenues sticky and recurring as clients will 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 also creates high barriers to entry for Veda’s competitors and with the advantage of scalability, or ability to grow revenues far quicker than costs, Veda looks a solid buy at current prices.

OzForex’s share price also took off after hitting the ASX boards back in October, but has since been sold off to $2.77 after posting its results for the full-year to March 31. Surprisingly it was reported the sell off was the result of analyst disappointment over the failure to hit new client number targets, although active clients were up 31% to 120,000 this was 2% below prospectus forecasts. For smaller FX brokers retail clients tend to be high margin, but very low volume and disproportionately cost accretive in terms of the additional operational work required. The better money is to be made on the wholesale clients with generally thinner spreads, but volumes perhaps hundreds of times higher. Perhaps the disappointment then was more reflective of the fast-rising employee costs, which almost doubled on the prior year, compared to revenue up just 39.1%.

An FX business like OzForex also has low barriers to entry and an increasingly competitive Australian market, with other low-cost operators like Western Union now fighting hard for market share. This could mean OzForex’s days of rapid growth are behind it. Post price slump OzForex still sells on an eye-watering price to pro-forma earnings ratio of 32, and will have to perform exceptionally to justify the market’s optimism. It looks a hold at best.

Veda looks the horse to back amongst these two, but there’s one more company with..

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Motley Fool contributor Tom Richardson has no financial interest in any company mentioned. You can find him on Twitter @tommyr345

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