- Credit Bureau Asia Ltd (SGX:TCU) is a leading player in the credit and risk information solutions market in Southeast Asia
- Its strong competitive moat and capital-light business should continue to perform well during the current inflationary environment.
- The company is in a great spot to deliver continuous free cash flow growth in the future used to acquire new growth and to boost shareholder distributions.
- Strong insider buying over the past two years exude confidence for investors establishing or reinforcing a position.
- It is currently not cheap, but reasonably valued for such high-quality business growing at a good rate.
Would you like to be paid for giving your opinion? Many people would love that, but the reality is that few people’s opinions are valuable enough to pay for. You must have a high level of credibility and a proven track record. Credit Bureau Asia Ltd (SGX:TCU) has all of that.
Credit Bureau Asia Ltd is the largest provider of credit bureau services within Singapore, the sole credit bureau in Cambodia and is the sole credit bureau in Myanmar. The fact that it is so difficult to compete with them gives them a lot of pricing power. This means they are able to generate wonderful returns on investment.
Company Overview of Credit Bureau Asia Ltd
Credit Bureau Asia Ltd is broadly categorized into two core segments;
Financial institution data business (“FI Data Business”)
Credit Bureau Asia Ltd has established credit bureaus in Singapore, Malaysia, Cambodia and Myanmar
Credit Bureaus operate to provide their subscribing members, mainly banks and financial institutions, with access to credit information on individual consumers or registered business entities. These reports are generated from up-to-date credit information contributed by subscribing members.
Everyone has a credit score. Everytime you apply for a line of credit, for example, a home loan, car loan, credit card, or personal loan, the lender checks your credit score. This check is done through a document known as a Credit Report. This report is a summary of all the major credit decisions someone has made in the preceding few years. It includes information such as your borrowing history and repayment record.
Non-financial institution data business (“Non-FI Data Business”)
Besides FI Data Business, Credit Bureau Asia Limited also provide customers with a wide range of business information and risk management services, sales and marketing solutions, commercial insights and other services.
This is done through joint venture partnerships with Dun & Bradstreet and operate through our subsidiaries Dun & Bradstreet (Singapore) Pte. Ltd. In a nutshell, D&B helps customers and partners accelerate growth and improve their business performance through the power of data and analytics. (see https://www.dnb.com.sg/)
In terms of segmental information, FI Data business and Non-FI Data Business revenue contribution is at 43.8% and 56.2% respectively. Profit contribution is fairly even at about 50% for both business segments.
Wide Competitive Moat
Credit Bureau Asia Ltd has a wide competitive moat from several sources.
1) There is a vast trove of high quality data that they collected. It would take a long time for a potential competitor to replicate. All this intellectual property, a combination of proprietary, licensed software and technologies are the first source of its competitive moat.
2) Efficient scale. It does not make sense for the market to sustain multiple rating agencies, just like it does not make sense for a city to have ten airports. In fact this is further reinforced by the fact that Credit Bureau Singapore is the largest provider of credit bureau services within Singapore (only 2 credit bureaus are allowed to obtain such information in Singapore), Credit Bureau Cambodia is the sole credit bureau in Cambodia and Myanmar Credit Bureau is the sole credit bureau in Myanmar.
Last year, Credit Bureau Singapore was designated as the new operator of the Moneylenders Credit Bureau (MLCB) under the Moneylenders Act by Singapore Ministry of Law. They will be the operator of the MLCB for a period of three years starting July 2021.
3) In the modern era, one of the most valuable things that companies can have is access to data. And few companies offer the amount and quality of data that Dun & Bradstreet has. Credit Bureau Asia Ltd’s Non-FI business segment is led by this subsidiary.
According to their company profile, their platform’s foundation is the world’s largest commercial database, with over 240 million company records we derive from 30,000 data sources and update 5 million times per day. More than 34,000 companies and 87% of the Fortune 500 trust Dun & Bradstreet to provide critical data and insights they need to create every-day connections with their most valuable constituents.
4) Credit Bureau Asia Ltd has a low capital expense requirement. As a service business it has negligible need for capex and can grow without consuming capital in other ways (like working capital).
Their tangible equity for the past ten years has remain relatively stable. Despite growing revenues from $35mil to more than $45m – and almost doubling earnings during this time – tangible book value has been kept consistent (excluding IPO money of approx $0.12/share).
|Tangible Book Value per Share||0.02||0.03||0.03||0.14||0.16|
As Russia’s war in Ukraine and the Fed’s tightening cycle show no signs of slowing, the market has been signaling some stress looming across financial markets.
Note rising interest rates are the equivalent of rising borrowing costs since it becomes more expensive for companies to raise capital via debt issuance. In turn, markets are experiencing some volatility as they adjust to a higher policy rate. That’s why we also Moody’s cut its 2022 guidance in May 2022.
Those ratings provided by rating agencies help determine the cost of capital for the corporations, governments, and other entities that raise capital through publicly traded debt. When debt issuance declines, ratings companies’ revenue would also fall.
However, I feel that the credit and risk information solutions industry performs well during both up- and down-cycles.
Companies would need to conduct more information checks on business partners during downturns or periods of increased credit risk, where business/clients tend to increase the frequency of credit checks on their customers to ensure accurate business decisions. During upcycles, the demand for loans and business transactions increases. This prompts FIs and companies to conduct more credit and risk assessments.
Singapore Industry Dynamics
We take a look at Singapore’s Consumer Credit Report for Q2/22 where there is an overall increase in new credit applications. The positive economic conditions in Singapore supported the demand for credit, stimulating the market for credit and risk information solutions.
There is this social and demographic trend driven by the falling fertility rate and the increasing desire to live independently. As such, the demand for properties (and therefore mortgages) increased. This drove the demand for credit and risk information solutions by FIs to assess loan applications.
The shift of public preference towards contactless payments also contributed to the growth of new credit card applications.
Credit Bureau Asia Ltd to Benefit from Singapore Digital Banks
On 4 December 2020, the Monetary Authority of Singapore (MAS) announced four successful digital bank applicants. This aims to enable non-bank players with strong value propositions and innovative digital business models to offer digital banking services. Singapore’s digital banking framework was introduced to retain Singapore’s position as one of the leading financial centres in Asia. It also allows for greater competition and spur greater innovation in finance.
Credit Bureau Asia’s growth is linked to the growth of its member network. The inclusion of a new financial institution in Credit Bureau (Singapore)’s (CBS) platform has a ripple effect. It amplifies the data pool for all members while creating more revenue opportunities for the group.
CBS’ fees are based on how many reports it generates for its customers (the banks), scoring requirements, portfolio size, and the number of notifications.
Of the four digital bank license awardees, ANEXT Bank and Green Link Digital Bank, both digital wholesale banks in Singapore, have recently announced in June that they have opened their virtual doors for business focusing on serving micro, small and mid-sized enterprises. The other two digital full bank licensees in Singapore are expected to make further announcements soon. Together, the four digital banks and Trust Bank are expected to have a positive impact to Credit Bureau Singapore Pte Ltd (“CBS”) results.Commentary from Credit Bureau Asia Ltd 1H22 Interim Results
Credit Bureau Asia Ltd has been growing its revenue consistently over the past few years. Higher revenue has translated into growing profit, which is in an overall increasing trend. Profit margins has also remained in the mid to high teens since 2018.
The qualities we discussed earlier about the company and its strong competitive moat, together with its enviable pricing power, result in unbelievably high operating margins of ~45%.
Other than high profit margins that reflect the quality of the business. The ROE values are those of a truly superior business.
The 2021 FCF yield is around 8%. Given Credit Bureau Asia’s ability to generate free cash flow, the company continues to be in a great spot to acquire new businesses and to increase both dividend and buyback volumes.
Kevin Koo Chiang, executive chairman and CEO of Credit Bureau Asia, has been acquiring shares from the market since Feb 21. The most recent transaction was in 18 Jan 2022 when he acquired 1,425,000 shares at $1.04/share, which amounts to $1.482mil.
Investors should factor this into their decision making process. This generally builds confidence for investors when insiders have invested such a large sum.
Credit Bureau Asia’s managed to scale its business without raising debt to unsustainable levels. While net debt has increased over the past 2 years, the net debt/EBITDA ratio is very low. This is due to high FCF generation and EBITDA growth.
Most investors tend to use P/E as a benchmark for valuations. For Credit Bureau Asia Ltd, P/E Ratio of 29x is considered steep. However, P/E ratio does not convey much as it is unable to overcome the distortions caused by Credit Bureau Asia’s strong balance sheet.
The EV/EBITDA ratio is preferable in this case because it considers the entire company’s worth. The PE ratio represents the equity multiple, whereas the EV/EBITDA ratio represents the firm multiple. Equity investing is more than just buying and selling stocks, but also buying and selling businesses.
Using EV/EBITA ratio, we add the market value of equity and debt and subtract the cash holdings. At an EV/EBITA ratio of 7.61, I believe that it is currently quite attractively valued for a wide moat resilient company. When looking at the valuation multiples it is important to remember that Credit Bureau Asia Ltd is a company that can potentially grow revenue and profit at at around 5-10% CAGR.
Based on information obtained from https://www.dividends.sg/view/TCU, Credit Bureau Asia Ltd pays a decent dividend of 3.4% at current share price of $0.995.
This exceeds their stated dividend policy of at least 90% of PATMI for FY2021 and FY2022.
Credit Bureau Asia Ltd has also stated that they intend to pay out at least 90% of the dividend income we receive from our subsidiaries and associates for the subsequent financial years of FY2023 and FY2024.
They informed that capital for future expansion of the Group will be funded using existing cash and/or other sources of funding. This means that we should expect a consistent dividend payout even in the event of an acquisition or large capital expenditure.
Credit Bureau Asia Ltd is a wide moat resilient business and seems to be fairly valued right now.
They have enormous pricing power thanks to its strong competitive moat. I believe that the competitive advantages that the company possesses give them strong pricing power.
We have not faced inflation for a long time. This is a risk with little precedent because much has changed structurally since 2020. Faced with this lack of information, it makes sense to return to the fundamentals, which is to look for capital-light businesses with pricing power. It is beneficial to own such businesses at any time, even better if they can be purchased at a reasonable price. Credit Bureau Asia Ltd appears to be ticking all the boxes right now.
Therefore, even though it seems cheap in terms of EV/EBITA currently, it is wise to be prudent in times of uncertainty and invest using the dollar-cost average method to mitigate the risks of investing at a higher than desired EV/EBITA multiple.
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