At a conference call yesterday (Mac 12), the management of CTOS Digital Berhad clarified certain aspects of the recent legal judgement against the company.
It confirmed the absence of an injunction that allows CTOS Digital to continue operating, as well as the legality on formulating credit scores.
RHB Investment Bank Bhd (RHB), in its Malaysia Company Update today (Mac 13), said while the risk premium has certainly risen, in view of this negative development, the share price selldown is overdone, providing an entry to a leading credit reporting agency (CRA) with a recession–proof business and growth avenues in the digitalisation age.
CTOS’ stance. Management indicated that it had been advised by its counsel that there is a strong basis for an appeal. It has since filed a Notice of Appeal to the Court of Appeal, and no material loss is anticipated.
Management believes that it is in compliance with the Credit Reporting Agencies Act 2010 (CRA 2010) and due process was followed with regards to the validation and accuracy of data. It noted that such litigation cases were a normal course of business, and CTOS has fended-off 12 different litigation cases in the past.
A defamation case; not in relation to legality ofCRA’s scope. RHB was made to understand that the court’s ruling in favour of the plaintiff was based on a defamation claim, rather than on the legality of providing value-added services such as credit scoring.
Also, there is no injunction stopping CTOS from continuing to sell its products under the purview of CRA 2010, which is currently the main concern among investors.
Business as usual (BAU). Management guided further clarification was done with the Registrar Office of Credit Reporting Agencies (PPK) and Bank Negara Malaysia (BNM) to confirm that CTOS is allowed and licensed to provide credit-related products under CRA 2010.
The regulators have been supportive of the CRA’s solutions/products over the years in complementing BNM and lenders (especially non-bank lenders) to enhance the entire credit system and minimise risks.
This has been an industry-wide practice, not just in Malaysia but globally.
Based on RHB’s channel checks with some financial institutions that subscribe to CTOS’ services – and also from CTOS’ own conversations with clients – the subscription to its services is unaffected.
Potential implications. The direct-to-consumer (c.9% of group revenue) segment may see slower growth due to the negative publicity and implications from this case.
Although highly unlikely, RHB may cut FY24F earnings by c.26% under the worst case scenario of CRAs are not being allowed to formulate and sell proprietary credit scoring-related products/services (c.15% of CTOS’s FY23 revenue as guided).
RHB keep their forecasts for now, but their DCF TP is lowered to MYR1.77 (includes 4% ESG discount) as we raise the risk premium to factor in the risks of such an implication.
Risks: Regulatory changes, slow topline growth, data security breaches, and litigation risk.
RHB keeps BUY, with new MYR1.77 TP from MYR1.93, 42% upside, c.3% yield.
