• Stay BUY and MYR1.77 TP, 26% upside, 2.4% FY24F yield. 1Q24 core PATAMI of MYR21.4m (+3.1% YoY) met expectations – given the expectation of stronger quarters ahead. We continue 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. CTOS declared a first interim DPS of 0.64 sen (1Q23: 0.43 sen).

• Within expectation. 1Q24 revenue of MYR71.6m (+20.1%) and core PATAMI met our and Street’s estimates at 17.2% of full-year forecasts as 1Q is usually seasonal weaker – it made up c.18-20% of prior full-year 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.

• 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.

• Forecasts. We maintain our earnings forecasts and DCF-derived TP of MY1.77, with a 4% ESG discount baked in. Downside risks: Regulatory environment changes, slower-than-expected topline growth, and data security breaches.

Source: RHB Research - 8 May 2024