The Motley Fool

Is it time to buy Veda Group Ltd?

Has Veda Group Ltd (ASX:VED) become a good investment opportunity?

With the ASX falling heavily over the last week I have been checking my analysis of companies for buying opportunities. Veda Group Ltd (ASX:VED) is one that has been on my watch list for some time now. I have watched on the sidelines as its price has run up about 25% in the last 12 months.

Veda is the largest credit reference agency in Australia and New Zealand. It provides credit reporting, credit scoring, and marketing analytics services.

Veda is now trading at around $2.20, a retracement of about 6% from recent levels. Its price-to-earnings ratio of 20.5 is high and earnings growth will need to be strong to justify a ratio that is considerably higher than the market average.

I am always wary of using analysts’ predictions for earnings as part of my valuations. In the case of Veda earnings are forecast to grow over 20% on average over the next two years. Even discounting that earnings growth heavily it is still impressive and supports a fair valuation in excess of the current price.

Looking in more detail at the financials for Veda, the first thing to note is strong revenue growth. Average annual revenue growth has been more than 12% for the previous 10 years.

One of my original concerns was the interest-coverage ratio of 2.15. This is well below my threshold of 4. A closer look shows debt was reduced from $616 million to $267 million last financial year. There was also a write-off of $12 million in capitalised borrowing costs. I expect interest expenses will fall substantially in the next period.

Dividend yield is only 2% but I would expect that to improve as the predicted earnings growth delivers higher profits in the future.

Veda enjoys a terrific operating margin of nearly 45%. It’s a reflection of the advantages of the business model. Costs are low and the business can be scaled up cheaply.

The recent changes to credit reporting legislation have also benefited Veda. Virtually all credit providers now have to use a service like Veda. As the main established operator in the sector Veda enjoys a strong competitive advantage.

Another area that has seen growth in the business is the concern over identity theft. Veda’s subscription service for consumers offers a notification service to help prevent identity theft. As a result it is now common for financial advisors and accountants to recommend clients use Veda’s services.

I believe Veda is worth considering adding to your portfolio. There should be strong upside in the price if it continues to deliver the predicted earnings growth.

NEW! The Motley Fool’s top dividend stock for 2015-2016

Handpicked by our investment experts, this promising ASX stock boasts a fully franked yield that puts term deposits to shame! You can get the name and code FREE in our brand-new report, “The Motley Fool’s Top Dividend Stock for 2015.” Click here now for your free copy.

Motley Fool contributor Rick Mooney has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

NEW. Five Cheap and Good Stocks to Buy in 2019…

Our Motley Fool experts have just released a brand new FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.8% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.