Analysis: Inviting margins ripe for picking

If a few years in the nurturing, and supposedly disciplined, environment of private equity ownership is meant to be transformational for a company, readers of the Veda prospectus might conclude that the board and management have delivered as promised.

In the years before the then Baycorp Advantage faded out as an ASX-listed company, in the mid-2000s, the EBIT margin on its decision solutions business (which today pretty much is the business) was four per cent.

Jump forward eight years and the business now known as Veda makes the prominent claim in the prospectus for its forthcoming ASX listing that it "has a track record of revenue and earnings growth, EBITDA margin expansion and strong operating cash flow generation."

On just margins, the prospectus states that "Veda enjoyed pro forma EBITDA margin expansion from 37.2 per cent in FY2011 to 39.8 per cent in FY2013, with FY2014 pro forma EBITDA margin expansion forecast to increase to 43.1 per cent."

"Veda also experienced pro forma EBIT margin expansion from 30.0 per cent in FY2011 to 30.6 per cent in FY2013, and it is forecast to be 35.3 per cent in FY2014."

These days, Veda is a highly commercial company, one the vendors and the investment banks behind the float are pitching as a growth play.

The main legacy of its days as a mutual - the Credit Reference Association of Australia - is the habit among CRAA's former owners, mainly banks, to turn to the company for modern-day versions of its classic product, the "negative" credit report.

Veda is now trying to coax more consumers to pay to receive these reports themselves.

But Veda, of course, does not have the field to itself and its worth remembering that banks have hedged their risk of being fleeced by a monopolist by seeding a joint venture rival managed by Experian. As noted in the previous article, Veda claims an 85 per cent share of the consumer credit reporting market in Australia.

Dun & Bradstreet also remains in the field, and, like Experian, markets a rival credit bureau.

The perceived dominance of Veda may be more imagined than real, however.

In a range of niche business research products, Veda's market share is no more than 52 per cent (for bankruptcy searches with the Australian Financial Security Authority) and as low as 11 per cent (for land titles searches).

For searches of the Personal Property Securities Register, Veda's market share is only 27 per cent.

CITEC, Dun & Bradstreet, GlobalX, SAI Global and Citec Confirrm (owned by Queensland's Department of Science, Information Technology and Innovation) are all checking Veda in these various niches.

One theme barely discussed in the prospectus is the potential disruption that the new privacy law entail - such as much greater accountability; consumer access to the complaints services of dispute resolution schemes; and bigger fines for making mistakes. All this will involve higher costs too.

And increased competition might make it hard for Veda to deliver the payback that investors want.