What Investors Should Know About Credit Bureau Asia Limited (SGX: TCU) At Its Share Price of S$1.15

The Singapore Exchange (SGX) just welcomed a new company, whose service many Singaporeans would have used previously.

The parent company of Credit Bureau (Singapore) (CBS), Credit Bureau Asia Limited (SGX: TCU), was successfully listed on SGX on 3 December.

Credit Bureau Asia debuted at S$1.15 per share, up from its initial public offering (IPO) price of S$0.93.

In Singapore, CBS is the largest provider of credit bureau services, and banks use its services to find out about an individual’s credit history before extending loans to the person.

CBS’ widespread popularity in Singapore could have led to its IPO being over 60 times subscribed.

If you didn’t manage to get your hands on Credit Bureau Asia’s shares, you can still do so from the stock market now that the company public.

But before you invest in Credit Bureau Asia, it’s important to understand its business and whether its shares are worth buying.

Right here, let’s find out if Credit Bureau Asia is worth investing using an investing framework that I use to analyse companies.

1. What’s Credit Bureau Asia’s Business About?

Credit Bureau Asia is a leading provider of credit and risk information to a wide client base in Singapore, Malaysia, Cambodia, and Myanmar.

The company’s customers include banks, financial institutions, multinational corporations, telecommunication companies, government bodies and public agencies, and individuals.

Credit Bureau Asia has two main business segments:

1. Financial institution data business (FI data business),
2. Non-financial institution data business (non-FI data business)

Under the FI data business, Credit Bureau Asia has established credit bureaus in Singapore, Cambodia and Myanmar through joint ventures with local and international partners.

Depending on the location, the credit bureaus provide their subscribing members (mainly banks and financial institutions) with access to consumer and commercial credit reports.

Those reports are created from up-to-date credit information contributed by subscribing members themselves.

For Credit Bureau Asia’s financial year ended 31 December 2019 (FY2019), the FI data business brought in 41.7% of revenue for the year.

Meanwhile, under the non-FI data business, Credit Bureau Asia has established joint venture partnerships with Dun & Bradstreet (D&B) in Singapore and Malaysia to provide customers with solutions such as business information and risk management, sales and marketing, and commercial insights.

Credit Bureau Asia sources the data from a variety of publicly accessible registries, the D&B Worldwide Network, as well as information contributed by businesses that subscribe to its payment bureau services.

For Credit Bureau Asia’s FY2019, the non-FI data business brought in 58.3% of revenue for the year.

2. Does Credit Bureau Asia Have a Wide Economic Moat?

A company with a wide economic moat is able to keep its competitors away, allowing it to get outsized business returns.

As for Credit Bureau Asia, it has the first-mover advantage in Singapore, Cambodia and Myanmar.

The extensive data that it has on consumers and businesses is difficult for new market entrants to replicate.

Credit Bureau Asia’s CBS had a 99.9% market share in Singapore’s FI data business in 2018.

It maintains credit files of over 3.7 million unique individuals and entities in Singapore, translating to a credit bureau coverage rate of around 64%, as of 31 December 2019.

Over in Cambodia and Myanmar, Credit Bureau Asia, through its associates, is the sole licensed FI data business provider.

Credit Bureau Asia’s non-FI data businesses in Singapore and Malaysia have high barriers to entry, according to its IPO prospectus.

Experian Credit Services Singapore is Credit Bureau Asia’s main competitor in Singapore. In 2018, D&B Singapore and Experian held a market share of 40% and 57%, respectively.

3. Is Credit Bureau Asia Financially Strong?

Now, let’s explore how Credit Bureau Asia has performed financially over the years.

Source: Credit Bureau Asia IPO prospectus

Credit Bureau Asia’s revenue and net profit have grown at an annualised rate of 6.7% and 16.3%, respectively.

With the faster growth in earnings, the company’s net profit margin has improved from 14.5% in FY2017 to 17.3% in FY2019.

What’s more impressive is that Credit Bureau Asia’s free cash flow has grown at a quicker pace of 33.3% than net profit has.

This shows that Credit Bureau Asia has a highly cash-generative business.

Free cash flow is money that a company uses to reinvest into its own business and pay dividends to its shareholders, among others.

With a business that can produce copious amounts of cash, it doesn’t need to borrow to sustain its operations, allowing it to have a rock-solid balance sheet.

A debt-free balance sheet ensures a company can survive or become even strong by acquiring its competitors during an economic downturn.

As of 30 June 2020, Credit Bureau Asia had S$29.6 million in cash and bank balances with no bank borrowings.

4. Who’s Behind Credit Bureau Asia?

Kevin Koo is the founder and executive chairman of Credit Bureau Asia.

He has over 25 years of experience in the credit and risk information industry and was responsible for the growth and expansion of the group over the past two decades. Koo oversees the overall management and operations of Credit Bureau Asia.

Post-IPO, Koo will own around 67.3% of the company.

The high insider ownership shows that the company’s top leader has plenty of skin in the game, and his interests would be aligned with those of Credit Bureau Asia’s minority shareholders.

Koo is assisted by William Lim, who has close to 20 years of experience in the credit and risk information industry and leads the initiative to expand Credit Bureau Asia’s credit bureau business across the region.

5. How Can Credit Bureau Asia Grow In the Years Ahead?

In terms of growth prospects for Credit Bureau Asia, there are a couple worth highlighting:

1. Growth in credit card penetration rates and banked population in emerging markets like Cambodia and Myanmar
2. Introduction of new products and services within Credit Bureau Asia’s existing markets (such as the digital banks in Singapore) leading to an increased usage of the company’s credit and risk information solutions
3. CBS was awarded a tender in October 2020 by Singapore’s Ministry of Law to develop, establish and operate the Moneylenders Credit Bureau (MLCB) for three years, with an option for further extension
4. Expansion into other countries such as Indonesia and Vietnam

Is Credit Bureau Asia Cheap or Expensive?

At Credit Bureau Asia’s share price of S$1.15, it has a price-to-earnings (P/E) ratio of 38x, using FY2019 earnings per share (EPS) and post-IPO outstanding share count.

If we were to annualise Credit Bureau Asia’s EPS for the six months ended 30 June 2020, we would get a P/E ratio of 36x.

Credit Bureau Asia’s doesn’t have a fixed dividend policy, but it intends to distribute at least 90% of its FY2021 and FY2022 net profit as dividends.

Let’s say Credit Bureau Asia’s EPS for FY2021 grows by 10% year-on-year (using conservative estimates) and using the 90% dividend payout ratio, its dividend yield would be 2.9%.

In contrast, the SPDR STI ETF (SGX: ES3), an exchange-traded fund (ETF) that can be taken as a proxy to the Straits Times Index (STI) has a P/E ratio of 13.1x and a dividend yield of 4%.

Therefore, in my opinion, Credit Bureau Asia’s shares are expensive since they are selling close to three times the valuation compared to the broader Singapore stock market.

Credit Bureau Asia’s dividend yield is not enticing to me too even after having a dividend payout ratio of 90%.

Conclusion

Credit Bureau Asia has the following investing merits:

1. A recognisable business with a wide economic moat
2. Dominant market share in the countries it’s operating in
3. Highly-cash generative business
4. Strong balance sheet
5. High insider ownership
6. Decent growth prospects

However, its valuation currently is too high for my liking.

I’d therefore be placing Credit Bureau Asia on my watchlist and re-consider it if the valuation comes down to a more palatable level for me.

I’d also be watching how the company matures as a public entity.

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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock.