Kenanga Investment Bank Berhad (Kenanga) downgrades CTOS Digital Berhad (CTOS) to Underperform with a lower DCF-derived TP of RM1.15 (from RM2.00) as they attach a higher risk premium stemming from a recent court decision which ruled that the group’s credit scoring facilities have been performed above their legal capacity.
CTOS has since filed for an appeal, which Kenanga expect its credit scoring products to be substantial contributors to the group. For now, business risks appear to deepen with likely immediate repercussions being a challenge to its business model and similar legal suits arising in the near-term.
In a recent court ruling, the High Court claimed that CTOS is not legally empowered to formulate credit scores and was not provisioned in the Credit Reporting Agencies Act 2010. This arose from a judgement whereby CTOS is ordered to pay RM200k in damages and RM50k in costs to a businesswoman in compensation for losses attributed by an inaccurate credit rating.
CTOS has filed for an appeal on this decision. Kenanga is wary that the above may serve as a challenge to its business model and a precedent and lead up to further similar legal suits in the near-term.
Business as usual for now. Kenanga expects CTOS to continue to operate as usual until a decision on the appeal has been made. While CTOS does not disclose the proportion of its revenue attributed directly from its credit scoring products or credit information services, we can gather that its non-credit related streams (i.e. digital solutions) could make up c.10% of its total revenue.
Downgrade to UNDERPERFORM with a DCF-driven TP to RM1.15 (from RM2.00). From Kenanga’s previous WACC of 6.0% and TG of 3.5%, they opted to raise their WACC to 7.0% and lower their TG to 0% in lieu of a higher risk premium attached to the stock. Meanwhile, Kenanga also lowered their ESG rating to 3-star (from 4-star) which strips out the previous 5% ESG premium on the stock.
On the flipside, Kenanga leaves their FY24F/FY25F earnings unchanged pending further developments from the above where its key clients (i.e. financial institutions) will continue to depend on CTOS for their credit assessment purposes whereby the group is the domestic market leader (c.80% market share).
Risks to Kenanga’s call include: (i) better-than-expected demand for credit-related services, (ii) stronger-than-expected associate contributions, and (iii) further acquisitions.
