It is double joy for CTOS Digital Bhd (CTOS) as it had achieved favourable results for the first nine month of the year (9M23) and secured approval from the Finance Ministry for its second 5-year tax exemption.
RHB Investment Bank Bhd (RHB IB) thinks the group is likely to chart record-breaking year, with growth from its various digital solutions and analytical insights, as well as potential new verticals, acquisitions, and increasing footprint.
In its Malaysia Results Review today (Oct 30), the research house said the group’s 9M23 core profit after tax, amortisation and minority interest (Patami) of RM75.4 million (+17.1% year-on-year) is within expectation, supported by strong core operational performances and higher share of profit from associates.
RHB IB reiterates BUY call and maintain its forecasts, with DCF-derived TP remains at MYR1.89, 32% upside with c.2% FY24F yield.
This is with a 4% ESG discount baked in, as CTOS’ 2.8 ESG score is below the country median, it added.
“We like the firm as a proxy to the secular trend of digitalisation, recession-proof business model, solid earnings delivery, cash flow generation, and strong ROE, which stands out in the sector,” it said.
RHB IB’s risks to call include regulatory environment changes, slower-than-expected topline growth, and data security breaches.
The research house said CTOS’ 9M23 results met its and Street’s estimates at 72.7% and 72% of full-year forecasts.
A 32.6% jump in 9M23 revenue to RM188.3 million was on strong growth in all segments – key accounts (+55.5%), commercial (+14.1%), and direct-to-consumer (+50.6%), it added.
“This is boosted by strong demand for CTOS’ data systems reports, digital solutions, and comprehensive portfolio review and analytics services, and resumption of Central Credit Reference Information System or CCRIS revenue (a cost pass-through) following the expiry of its fee waiver in Dec 2022.
“Share of profits from associates also charted a commendable, an increase of 23.7% year-on-year (YoY) to RM17.4 million. CTOS has also declared a third interim single-tier dividend of 64 sen per ordinary share (which will be paid on Dec 22),” RHB IB said.
CTOS Digital declared a third interim single-tier dividend of 64 sen per ordinary share, which will be paid on December 22.
The research house also noted that on Oct 27, CTOS finally received approval from MoF on the extension of a second 5-year tax exemption from 9 Nov 2021 to 8 Nov 2026.
“There will be a reversal of c.MYR27.8m in tax provisions from Nov 2021 to 30 Sep 2023 to be recognised in 4Q23,” it said, adding this have been factored in for earning forecasts and core PATAMI number.
RHB IB said the management is optimistic on CTOS’ growth trajectory, with higher ARPU fuelled by rising adoption of digital solutions
and in-depth analytical insights, new customers on-boarding, and financial literacy drives.
“The recent ASEAN expansion via acquisitions in Indonesia and the Philippines offer long-term growth potential for alternate data credit centric solutions.
“New adoption from both financial institutions and insurers of its client on-boarding and loan origination systems are set to propel growth going into FY24 aside from product expansions,” the research house added.
Meanwhile, Kenanga Research also echoes RHB IB’s sentiment, as it noted the higher 9MFY23 normalised net profit of RM75.5 million, up by 13%, and its pioneer tax status exemption.
“4QCY23 could see more activities as opposed to 1HFY23’s period, holding group profit guidance firm. This would be supported by its recent regional acquisitions going forward,” the research house said.
Kenanga therefore maintains its OUTPERFORM call, with a slightly higher DCF-driven TP of RM1.85 (from RM1.80).
It said that the revised TP came from adjustments to its risk-free rate to 4.0% (from 4.5%), lowering its WACC to 6.0% (from 6.2%) while leaving its TG of 4% unchanged, attributing 5% premium to its fair value in line with its 4-star ESG rating for the stock.
“We continue to like CTOS as we see merits leading presence in credit reporting (c.80% domestic market share), synergistic gains to progressively materialise, and scalable operations for future regional penetration.
“Although the group is typically forthcoming with its earnings guidances, there could still be room for surprises should its regional ventures perform better than expected,” it added.
Kenanga risks to call include lower-than-expected demand for credit-related services, incurrence of unexpected costs, and loss of pioneer status.
