Veda Group Ltd (ASX: VED) is a company many investors may not know much about. It has only been listed for 18 months and although the broader market has been volatile, Veda's share price has remained subdued.
Veda is the largest credit reference agency in Australia and New Zealand. The services it provides include credit reporting, credit scoring and marketing analytics.
Although the shares seem fully valued at the current price, I believe Veda has qualities that will make it a good long-term investment if purchased at the right price. With that said, here are five reasons investors should have Veda on their watchlist:
1. Proven Performer – Obviously investors should not rely on past performance but it is important to be aware of a company's track record. Veda has a strong track record of growth with over 20 years of consistent growth. This should give investors some confidence that the management team is capable and is focused on improving shareholder returns.
2. Market Leader – Veda is able to leverage its scale to create sustainable competitive advantages. It holds the largest commercial database of individual and business records that enables it to create the most comprehensive analysis and predictions for its clients. These data assets also help grow loyalty to Veda as its clients benefit from stronger relationships with their own customers.
3. Diversification of revenue streams – Veda does not rely on one particular business unit to drive earnings growth. Although consumer risk and commercial risk services have been the traditional drivers of growth for Veda, its marketing services have been growing strongly and there is considerable potential for further growth in that sector. The company also has plans to expand into new segments such as wealth management and legal services.
4. Excellent Margins – Veda operates on an impressive margin of around 43%. The business is capital light and management has been disciplined in maintaining capital expenditure at the same percentage of revenue even as the company has expanded. Although a new competitor may enter the market and possibly force margins down, Veda's competitive advantages means it will be well placed to defend its market share.
5. Regulatory Tailwinds – Veda will benefit from credit reporting legislation that has been introduced recently. Credit providers will now have to implement more comprehensive credit checks when dealing with high risk customers. As Veda is the market leader in providing credit analysis, the new legislation should be a tailwind for earnings moving forward as more financial institutions will require the services it provides.
Foolish takeaway
The impact of a new competitor remains a risk for Veda but the competitive advantages it possess and increasing demand for its services should see it maintain its dominant position.
At the current share price, Veda shares are trading at around 25x FY15 earnings and investors should expect to receive a dividend yield of around 2.5%. Although the long-term outlook is positive, I don't think the short-term upside potential is large enough to take a significant position just yet. Instead, investors might be better off keeping a close eye on Veda and waiting for more value to appear before buying.
If you think Veda looks interesting, then you need to check out The Motley Fool's new small cap report!
