RHB Investment Bank (RHB) continues to like CTOS Digital as the leading credit reporting agency. It has a recession–proof business model and multiple growth avenues in the digitalisation age, which deliver solid earnings and cash flow generation.
RHB stays on BUY and MYR1.77 TP, 26% upside. CTOS declared a first interim DPS of 0.64 sen (1Q23: 0.43 sen) and its 1Q24 revenue of MYR71.6m (+20.1%) and core PATAMI met RHB’s and Street’s estimates.
Healthy double-digit revenue growth was seen in all segments – key accounts (+36.2%), commercial (+6.7%), and direct-to-consumer (+14.5%) – boosted by higher sales of data systems reports and digital solutions.
Margins and costs. Gross profit dipped to 73.2% (1Q23: 79.8%) on the lower margins for the digital solutions and international segments. Core PATAMI margin was bogged down by higher depreciation & amortisation charges, selling & marketing and administrative expenses, and lower associates’ profits. International operations (newly acquired subsidiaries) booked revenues and profits of MYR8.5m and MYR0.3m, while share of profits from associates contracted 18.7% YoY to MYR1.8m due to lower contributions from Juris Technologies or JurisTech and losses from RAM Holdings given the seasonally weak quarter.
Sequentially weaker. CTOS posted sequentially weaker revenue (-2.1%) on the back of a lower business run-rate in 1H and certain revenue deferments for a few major projects.
The 26% QoQ contraction in core PATAMI was further affected significantly by lower associates’ profits and higher depreciation & amortisation charges. These were compounded by a high base effect in 4Q23 following the recognition of certain comprehensive portfolio reviews and analytics services.
RHB said management remains optimistic on CTOS’ growth trajectory and is adamant on meeting internal targets – driven by a strong pipeline and customer conversions, and upselling of analytics services and other solutions in the international segment.
Domestically, higher adoption of digital solutions for eKYC multi-face ID, comprehensive portfolio reviews and analytics products, and on-boarding of new customers will drive growth for FY24.
At associate level, the digital platform launch, product expansions, and new project wins are among the growth catalysts. Management also said the hearing date for the appeal on an ongoing litigation case is fixed for 9 Jul.
Court Ruling Overshadows Earnings
Operationally, it appears CTOS, based on its CTOS’s 1QFY24 results to be business as usual with the appeal hearing date of an unfavourable court ruling recently fixed for Jul 2024.
Kenanga Investment Bank (Kenanga) today said they remain cautious with CTOS’s ongoing predicament and maintained their forecasts, and TP of RM1.15 with an UNDERPERFORM call.
CTOS’s 1QFY24 net profit of RM20.8m only made up 16% each of both our full-year forecast and the full-year consensus full-year estimate. However, Kenanga deems the results within expectations as they expect a stronger 2H due to seasonal factors, coupled with a better project flow expected during the later part of the year.
The group emphasised on its ability to meet its earnings target of RM125m-RM130m on the back of back-loaded earnings amidst several on-going projects which could materialise in subsequent periods. Under its belt are enhanced e-KYC digital solutions as well as subscription-based features which may also register chunky revenue recognitions while supporting a higher recurring fee business model.
With regards to its recent court ruling, the group shared that it has fixed the hearing date of its appeal on 9 July 2024, of which it is confident to succeed. In between, the group has yet to experience the emergence of new litigation cases aside from the five on-going ones.
While there could be merit to the group’s legitimacy in offering key credit scoring solutions, Kenanga believes the elephant in the room still stands, i.e. the court’s interpretation that poses a challenge to CTOS’s business model.
So far, it does not appear that an injunction of any sort will be sought by any party against its products. Nonetheless, Kenanga believes the onus is on CTOS to show that the court decision will have no impact on its day-to-day operations and financial performance.
