Warren Buffett is an unashamed lover of moats, not the crocodile filled ones around castles, but rather economic moats of companies formed by a long history of outperformance. One Australian company that might appeal to him in coming years is credit report and data analysis provider Veda Group Ltd (ASX: VED).
Veda's economic moat, or economic advantage over rivals, appears to be one of the largest of all listed Australian companies. Veda maintains comprehensive credit files on over 20 million people and 5 million businesses in Australia. These reports contain information about loans applied for, payments made and missed, and generally how good the individual or business is at paying bills.
It sells these reports to companies such as banks and insurers that want to know how reliable a customer is likely to be at repaying their debts, or to individuals wanting to find out their own credit score.
Reason 1: Absolute Dominance!
In the consumer credit report segment, Veda dominates the Australian market and has few competitors of any reasonable size. It would take significant resources for a rival to build an equivalent database of information in order to challenge Veda. In the business segment, it occupies the top spot but has more competition from the likes of Dun and Bradstreet.
Reason 2: Scalable Business!
Veda is an information vacuum, its computers and employees work behind the scenes to draw in a huge amount of data and process it regardless of the importance of the person involved. The low interest rate environment is increasing interest in home and personal loans which should translate to higher revenues that flow straight through to profit on the relatively fixed cost base.
Reason 3: International Expansion!
Veda is not resting on its dominant Australian laurels. The company operates in New Zealand, and like other dominant Australian companies like Carsales.com Limited (ASX: CRZ) and REA Group Limited (ASX: REA) has taken minority equity positions in credit bureaus in Singapore, Malaysia, Cambodia and the Middle East. These positions may be added to in the future to diversify income sources.
Price
Some analysts claim that a price to earnings ratio of 27 is too high for a company like Veda, but with structural tail winds of improving credit growth and the growing profile of the credit score, earnings can feasibly grow between 10% and 20% per year for the next three years.
