Credit Bureau Asia Limited IPO – A Defensive Business Model With A 30x PER Valuation

Credit Bureau Asia (CBA) has just lodged its final prospectus for an initial share offering that will raise S$53.9 million.

This comprises an offering of 28.5 million placement shares and 1.5 million public offering shares at an offer price of S$0.93.

Separately from the IPO Offerings, the Cornerstone Investors will subscribe at an aggregate of 28 million new shares at the Offering Price of S$0.93. This constitutes approximately 12.2% of the total number of 230.39 million shares issued as of the date of the listing.

The Offering will close at 12 noon on the 1st December 2020, and the trading of CBA shares will commence at 9.00 am on the 3rd December 2020.

Introduction

Credit Bureau Asia (CBA) is the leading player in the credit and risks information solutions market in Southeast Asia, providing credit and risk information solutions to an extensive client base of banks, financial institutions, MNCs, government bodies, public agencies, and individuals across Singapore, Malaysia, Cambodia, and Myanmar.

These include products and services such as credit and risk information reports, credit scores, data analytics, and client-specific tailored requests and solutions.

The Group has established a credit bureau through an Associate or Joint Venture in each of the respective countries they operate in:

• Credit Bureau Singapore (CBS)
• Credit Bureau Cambodia (CBC)
• Myanmar Credit Bureau (MMCB)

The full structure of the Group as at the date of the Prospectus is as follows:

Source: Credit Bureau Asia Limited Prospectus

The main business model of the company encompassed their revenue model into two core segments:

i.) Financial Institution Data Business (“FI Data Business”)

ii.) Non-Financial Institution Data Business (“Non-FI Data Business”)

Financial Performance

The Group has done relatively well financially in the past few years, even during the first half of this year when faced with a pandemic outbreak.

In the 1HFY20, the Group’s revenue came in at $20.5m, which is an increase of 4.5% year on year.

The revenue from the “FI Data Business” increased by $0.1m or 1.6% from $8.4m in the first half of FY19 to $8.5m in the first half of FY20.

The revenue from the “Non-FI Data Business” increased by $0.7m or 6.5% from $11.3m in the first half of FY19 to $12m in the first half of FY20. This was mainly attributed to the i.) increase in revenue contribution (+$0.5m) from the Singapore and Malaysia commercial credit risk reports sold to international customers, driven by the increased demand for compliance on requirements globally; and ii.) increase in revenue contribution from the increased sale of reports under the Singapore Commercial Credit Bureau division.

Source: Credit Bureau Asia Limited Prospectus

Source: Credit Bureau Asia Limited Prospectus

The business model is also highly cash-generative.

From FY2017 to 1HFY20, the Group had a net operating cashflow of $10.9m, $12.0m, $19.8m, and $10.8m respectively, which translates into a cash conversion ratio of 69.7%, 72.6%, 85.0%, and 83.3%.

In FY2019, the Group had an acquisition in a business which resulted in a net CAPEX spent of $6.7m during the year. In FY2018, the Group’s negative cashflow from investing activities were due to placement in long-term fixed deposits.

The Group was also rather generous with the previously dished out dividend payouts:

• In the first half of FY20, the Group paid over $15.4m in dividends to its shareholders and non-controlling interest holders, even though profits after taxes only came in at $3.72m. 
• In FY19, the Group paid out S$5.9m in dividends.
• In FY18, the Group paid out S$10.4m in dividends.
• In FY17, the Group paid out S$21.7m in dividends.

Reasons To Like Them

The Group has proclaimed itself as having the first-mover advantage in Singapore, Cambodia, and Myanmar which has allowed them to build rapport and maintain relationships with the various businesses and individuals. While they are not operating on a monopoly model (more on that below), it would nevertheless be difficult for new market entrants to replicate their model due to the regulatory and the extensive database and expertise they have maintained over the years with these businesses.

Also, I find that the business model they are operating is also defensive in nature.

During a period of economic boom, the bureaus would benefit from an increasing number of business registrations, the volume of transactions, and increase lending activities – thereby uplifting the demand from the request of the credit and analytic reports. There would also be an increase in demand in the consumer credit report applications due to an increase in confidence in business activity as more people are buying more assets, lending more, and transacting more volume.

During a period of an economic downturn (such as the one we’re experiencing right now during the Covid) – banks, financial institutions, and businesses are likely to conduct more stringent risk assessments on an individual profile when it comes to lending and borrowing which leads to purchasing more credit reports for risk mitigation purpose. Businesses are more wary of higher credit risks of their existing and prospective customers which will encompass them to purchase more in-depth reports that provide better assessments so companies can make better evaluations as a whole.

Global trends of increasing government and industry regulation, risk management requirements, and the rising importance of data in decision-making, have resulted in increasing importance and need for credit and risk information solutions as they become a fundamental component in the business decision-making process.

Competitors

In Singapore, Experian Credit Services Singapore Pte Ltd. is their main competitor.

For the year 2018, D&B Singapore and Experian Credit Services Singapore held 40% and 57% of the market share respectively – essentially making them an oligopoly in these sectors.

In Malaysia, the Group competes with three other major operators in the Non-FI Data corporate credit bureau space – CTOS Data Systems Sdn Bhd, Basis Corporation Sdn Bhd, and Experian Information Services (Malaysia) Sdn Bhd.

Future Growth & Synergies

The Group will continue to drive for organic growth in the Singapore market under the regulatory regime of the Credit Bureau Act by making preparations to provide corporate credit reporting through CBS under the commercial bureau operator license which the Group intends to apply. This will provide a huge amount of synergies to the volume in addition to the existing consumer credit reporting license which focuses solely on a consumer individual.

For the Non-FI Data business, the Group intends to expand and increase the market penetration of their risk diligence solutions products and service offerings in the Singapore Commercial Credit Bureau platform.

The Group also intends to focus heavily on the next two hottest markets – Cambodia and Myanmar as the penetration growth looks to supersede and increase in the next few years. The Group will introduce additional product offerings and services that cater to these markets.

Valuation

At the price offering of $0.93 cents, this trades well at a massive 30x Price to Earnings (PER).

It is not cheap but they certainly have the growth and defensive factors baked in the valuation.

While the Group did not declare any dividend policy, the Board intends to pay out dividends of at least 90% of CBA’s net profit after taxes for the year FY2021 and FY2022. Based on the latest EPS, this would translate to about 3% yield at the offer price.

For investors who are looking at both yield + growth play, this may suit your type of needs.

Conclusion

I think the IPO would make a strong performance on the day of the offering, given the strong cornerstone investors and the clear growth strategy they have listed out.

Clearly, the valuation doesn’t make it any cheap but given the defensive business model of how well it has performed during the pandemic and a clear growth strategy, we should have good interests in the company.

Also, we currently have a global market that is on the way back to recovery so that should also play out well for the offering.

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