Alert: Which Floats Will Sink or Swim?
Veda opens near our intrinsic value estimate of $1.77.
As you know we have been speaking about the only game in town being the current rash of IPOs for some time.
The insights blog is replete with our thoughts on radio and TV and you can listen to our commentary here, here, and here.
Despite our enthusiasm for floats, you must be selective. Several floats haven’t been as buoyant as many had hoped and our analysis and processes (some of which have been articulated here over the years) have identified Veda Group as an attractive opportunity (we valued the company’s shares at $1.77) in a sea of IPOs headed to the bourse before Christmas. Now, before you go rushing to take a punt you must do your research and you must seek and take personal professional advice.
IMPORTANT NOTICE: Montgomery was a cornerstone investor in Veda at $1.25 prior to its listing today and Montgomery owns shares in the company.
Established in 1967, Veda is the largest credit reference agency in Australia and New Zealand, providing credit reporting, credit scoring, and marketing analytics services. Since its establishment, Veda has been building an enviable database on the borrowing and repayment behaviour of 20 million Australians. Veda’s customers, including banks, telecommunications companies, utilities providers and government departments, use the company’s database, which is growing by 700 million updates annually, to make decisions on whether to extend credit and to verify identities and check employee backgrounds.
The company charges a fee every time a credit check is conducted, generating revenues of $1 million per day.
One of the appealing aspects of this business is the potential for growth that emerges from the forthcoming changes to the regulatory environment. On the flipside however, competition will emerge as foreign competitors seek to extract a return from the new regime.
Veda has been in the hands of Pacific Equity Partners (PEP) and Merrill Lynch since 2007, when they paid $814 million to take the company private. You might be nervous buying a business from private equity, however we believe the Veda float might have been priced to help PEP improve its reputation ahead of a pipeline of floats next year. It is also relevant that the proceeds are being used to reduce debt and PEP will retain a 63.5 per cent stake. Experience suggests that an exit would likely be a year or two down the track, and preferably at higher prices. With that knowledge, what conclusions you reach about the prospectus forecasts and whether they are likely to be beaten are yours alone.
Veda’s biggest threat is the entry of Experian, a global information services group, which has formed a joint venture with six Australian Financial Institutions. Despite the obvious threat from such a tie up, Experian has elsewhere failed to achieve scale in new markets without acquisitions.
While many fund managers may stag floats with the aim of realising a quick profit, Montgomery Investment Management will only participate in companies that have compelling long term prospects, and this is one company that we are currently reluctant to sell.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
glenice allman
:
Hi Roger,
I am perplexed; I have had a look at Veda on Skaffold, and it has a C4 rating, yet you (the fund) have invested in it. I thought you would not touch a company with C quality. Interested in your response for 2 reasons: I am a Skaffold subscriber and seeker of knowledge of value investing; and I am a holder in the Montgomery Fund.
Glenice.
Roger Montgomery
:
Hi Glenice, we believe the data provider doesn’t have complete data because its a newly listed company and the company hasn’t provided all the data. This is rare and unusual but something to take into consideration. At the half year there will be a clearer picture.
matt
:
What are your thoughts on Affinity education? is there potential for value here?
Roger Montgomery
:
Prefer G8 which we hold in The Funds so please seek and take personal professional advice.
Darren
:
Hi Roger, am interested in learning more about your investment fund and possibly joining… Thats the good part !!!! I find it very frustrating watching sky business channel night after night and am perplexd by the lack of understanding of whats wrong with our econemy and why people arn’t spending.. This starts at the top with Reserve bank Governor and people running this Country right through to most econimists on this show. They have been getting it wrong for 6 years now and still don’t understand what is wrong. As a proud Australian I am disgusted by the fiscal leaders in this country…. Also it would be great if the hosts of the shows on sky business could actually let their guests answer their questions rather than answer them themselves. This happen far to often !!!! I would love to be able to catch up with you to discuss my views in more detail. Wanted to ring tonight but could not do myself justice in the short amount of time available.. Regards Darren………. Hope to hear from you?????? Thanks
Roger Montgomery
:
Hi Darren, Feel free to send an email through to me at your convenience…
michael white
:
To roger,
I will be interested to know your thoughts on healthscope which will be floated. likewise as the market is falling has that presented buying opportunities for the fund. Keep up the good work as you are the ausralian warren buffett
Michael white bpharm mps
Roger Montgomery
:
Hi michael,
AMongst the ASX 100 there’s is very little that meets all of our criteria. We have been twiddling our collective thumbs for a few weeks now so have been focused on analysing all of the floats coming to market. We have taken cornerstone investments in Veda, Lifehealthcare and Covermore. Life healthcare is interesting because big insto’s received stakes but we expected that the size of the company and their respective (very small) holdings will see them sell out. This will put some pressure on the price. The next step might be for the small and micro cap managers to start meeting with the company and when and if they like it we might see it re-rate…Veda of course was a standout. It was obvious to us that it was cheap at $1.25 but we didin’t expect it to trade at our estimated value of $1.77 on the first day.