CGS-CIMB Research analysts Andrea Choong and Darren Ong have initiated coverage on Credit Bureau Asia (CBA) with an ‘add’ rating and target price of $1.53, with CBA’s defensive business model and market dominance in Singapore cited as key factors.

CBA operates as a credit and risk information solutions (CRIS) provider. It aggregates and repackages credit information into useable reports and data packets for sale to its customers, which span both financial institutions (FI) and non-FI clientele.  Their products include one-off reports for loan applications, pre-employment checks and pre-screening of business partners, as well as customised monitoring services for higher-risk exposures.

In a research note dated March 16, Choong and Ong highlight CBA’s position as a market leader (by revenue) in Singapore’s CRIS space via its subsidiary Credit Bureau Singapore (CBS), which is underpinned regulatory requirements.

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“Institutions wishing to conduct a lending business are required by the Monetary Authority of Singapore (MAS) to make enquiries with a credit bureau prior to commencing operations,” they explain. Given CBS’s long-spanning track record of 18 years, the analysts say the company has clear headway in terms of data collection, making barriers to entry into the Singapore CRIS space high for new players.

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In addition, CBA has joint ventures in Cambodia and Myanmar that are the sole credit bureaus in both countries, allowing CBA to benefit from first-mover advantage.

Choong and Ong also note the defensive nature of CBA’s business model. “We view CBA’s business model to be resilient across economic cycles – as a gauge of creditworthiness during periods of economic growth and to assess counterparty risk during cycle troughs,” they say.

CBA’s FY2020 ended December 2020 revenue grew by 7% y-o-y despite weaker loan application volumes, due to stronger demand for review reports from financial institutions and commercial clients.

The analysts expect risk review volumes to remain robust as business sentiment recovers. To that end, they forecast CBA’s earnings per share (EPS) to grow between 8 to 28% y-o-y in FY2021 and FY2022.

Choong and Ong also point out that CBA’s business model is highly cash generative, with minimal capital expenditure requirements that mainly required for upgrading technology infrastructure. CBA generated $20.6 million in operational cash flow in FY2020.

“We believe that CBA’s operating cashflow will be more than sufficient to cover future development capex (circa $4 million in FY2021, normalising to circa $1.5 million thereafter), sustaining its net cash position,” they add.

Looking ahead, the analysts predict solid growth for CBA, with population growth and increasing urbanisation to drive credit demand, while the onstream of digital banks drive will enlarge the marketplace. To that end, they forecast EBITDA to grow between 8 to 18% during FY2021 to FY2023.

The target price of $1.53 is derived on a discounted cash flow basis and assumes a long-term growth rate 1.2%, weighted average cost of capital (WACC) of 7.%, risk-free rate of 1.5%, and beta of 0.9.

As at 12.40pm, shares in CBA are up 7 cents or 5.56% higher at $1.33.