Veda Group: Result 2015
Recommendation
Veda Group's 2015 result was bang in line with expectations. Revenue, EBITDA, net profit and earnings per share (EPS) all grew by double digit rates (see Table 1). They needed to, because Veda trades on a premium price-earnings ratio of 22.
There were however a couple of small issues with the result. Although perhaps they're not so small, because they've contributed to the share price falling 15% since we first covered the company in detail in Veda's dark side from 6 Aug 15 (Hold – $2.41).
The first relates to a familiar theme this reporting season. Higher capital expenditure (capex) over the past two years will cause higher depreciation and amortisation charges in 2016 and beyond. It implies 2016 net profit will grow more slowly than revenue; we're now expecting slightly less than 10 cents in EPS this year.
Year to 30 Jun | 2015 | 2014 | /(–) (%) |
---|---|---|---|
Revenue ($m) | 339 | 302 | 12 |
EBITDA ($m) | 145 | 129 | 12 |
NPAT ($m) | 78 | 69 | 13 |
EPS (c) | 9.2 | 8.2 | 12 |
DPS (c) | 6.0* | 4.0 | 50 |
Franking (%) | 0 | 0 | N/a |
* 6 cent final dividend, unfranked, ex date 8 Sep | |||
Note: Figures are underlying results |
What's more concerning is that capex continues unabated. We'd expected that, with the introduction of comprehensive credit reporting (see the last review), total capex would start to wind back from 2015's figure of $53m. Instead management announced that capex was likely to be in the range $55m-$60m a year for the foreseeable future.
Capex is all very well, as long as it generates acceptable returns. But in the short term the spending means Veda's sustainable free cash flow yield in 2016 will be more like 3% (at a price of $2.06), compared with the 3.5% we calculated in Veda's dark side (at a price of $2.41). The stock looks poorer value.
Pacific Equity Partners sold the last of its stake in February, so perhaps it's not surprising that the 'niggles' we mentioned in the initial review are morphing into 'concerns'. Veda is a wonderful business but it seems profit growth and free cash flow will be weaker than expected.
We'd still like to buy this business but now demand an increased margin of safety. We're reducing our Buy price to $1.60, our Sell price to $2.80, and our maximum portfolio weighting to 5%. The stock remains a HOLD.