McLaughlin paints bright future as Baycorp's share price falls

By Nick Stride

Friday 28th June 2002

KEITH McLAUGHLIN: What can I say?

Baycorp Advantage's Keith McLaughlin is choosing his words carefully these days.

With the company's share price trading at half its value of six months ago, he's keen to talk about the December merger and how well it's going, to emphasise its sound fundamentals and to boast about the results it's delivered so far.

He's less keen to talk about the perceived competitive threat of new rivals on both sides of the Tasman.

So no assessment of the financial capacity Dun & Bradstreet Australasia or Credit Data - "I couldn't really say."

And no response to claims a stoush with New Zealand debt collectors has weakened Baycorp's database.

"I don't want to get into a slagging match."

That's probably just as well.

John Harrison, managing director of Credit Data member East Coast Credit Control, this week circulated to media a letter to the New Zealand Herald demanding a retraction and apology for "defamatory, deliberately malicious, and factually incorrect" statements attributed to Mr McLaughlin.

Sharebroking analysts blame Baycorp's price fall on a host of factors such as the threat of competition, merger worries and technical market factors such as institutions re-weighting their portfolios post-merger.

The most heinous culprit is a general market "de-rating" of growth stocks. That is, investors are no longer prepared to pay high multiples of last year's earnings per share on the assumption they will be justified by rapid future earnings growth.

Mr McLaughlin insists that, as far as Baycorp is concerned, their loss of faith is unjustified. The company's historical record of 20% annual earnings growth can be maintained.

For the six months to December - a period during which, he points out, the boards and management of both Baycorp and Data Advantage were preoccupied with negotiating the merger - earnings (ebitda) calculated "pro forma" as if the companies had already merged rose by 17% to $A24.9 million.

That performance will be maintained for the full June year even with the management resources devoted to pulling the companies together.

"I've had no disappointments in the first six months," Mr McLaughlin says.

"Everything we aspired to achieve, we have achieved. What more can I say?"

The merger wasn't "ego-driven" but made sense on commercial fundamentals, he says. Customers such as banks and finance companies operated on a regional basis and wanted Baycorp to do the same.

Mr McLaughlin has been courting the media and analysts heavily, with some effect.

Some broking houses think the shares, trading at around $4, have bottomed.

UBS Warburg rates them a "strong buy," valuing them at $A5.10 ($5.92) on a discounted cash flow basis.

ABN-Amro is less bullish with a recommendation of "add" (a notch below its "buy" rating) and a DCF valuation of $4.16 ($4.84).

In response to market concerns Baycorp's monopoly in credit information might be lost if both brokers undertook a Porter analysis.

ABN Amro rated the threat from new entrants at three out of five, noting low initial barriers to entry. But it said it would be hard to replicate Baycorp's credit information database, which houses 17 million records and covers almost every adult Australian and New Zealander, or its economies of scale.

The other "competitive" threat - which ABN thinks unlikely - is that customers might take their business back in-house, using their own records to assess credit applications.

Mr McLaughlin says that's why Baycorp can't charge monopoly rents.

"The bottom line is that your customers won't let you do that - they can use their own in-house records."

Some still did so with high- and low-risk prospects, going to Baycorp only for marginal applications. "There are a lot of companies on both sides of the Tasman still doing things in-house that we could do for them. It's a confidence thing and it's starting to happen."

Prices haven't risen since the merger, he says, but customers are getting more value for the same price.

As for the allegations and counter-allegations being bandied about between Baycorp and Credit Data, Mr McLaughlin won't comment on specifics.

He will, however, say Baycorp risks fines of up to $200,000 if faulty records can be shown to have caused a credit application to be turned down.

"We've had to be so bloody careful about the data."

He doesn't rate credit information competitors as a serious threat.

"You can't just have a database and say 'we're a credit bureau.' You've got to have a customer base."

And he's confident credit providers don't want competitors and won't use them.

The technology task alone would be onerous.

Each provider, he argues, has to build host-to-host links between their bases and Baycorp's.

If they had two bases to deal with that would mean two files on a customer so the "decisioning tool" - the software that makes the creditworthiness analysis - would have to be modified.

Simply because one file showed, for instance, four defaults and another showed seven that wouldn't mean 11 defaults overall - some would be double-ups.

In any case, the analysts say, credit information is not the only string to Baycorp's bow.

The receivables management side of the business is also performing strongly and ABN Amro points to "a swag of opportunities providing 'blue sky' longer-term growth."

Among these are Baycorp's Asian ventures. Mr McLaughlin has been discouraging the market from factoring in any significant earnings contributions from these for at least 12 to 18 months.

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