Investment Highlights

• We initiate coverage on CTOS Digital Holdings (CTOS) with a BUY call and SOP-based fair value (FV) of RM1.80/share with a total potential return of 28% (26% potential capital gain and 2% dividend yield).

• Our FV implies a compelling PEG of 1.4 vs. global peers’ average of 4.3 due to CTOS’ superior FY22F-FY24F earnings CAGR of 43% (vs peers’ average of 14%). This stems from the company’s unique position in an underpenetrated market with strong economic moat. We ascribed 4-star ESG rating to the company, which adds a 3% premium to the FV.

• CTOS, Malaysia’s dominant credit rating agency with a substantial market share of 72% based on revenue, has a deep economic moat built upon comprehensive databases, including self-reinforcing proprietary information, which allow the firm to provide more expansive product offerings that cover each stage of consumers’ lifecycle with accurate data analytics. Coupled with data security infrastructure spending and the need to gain consumers’ trust, new entrants require substantial initial investments to be competitive.

• The group is taking a multipronged approach to drive its future earnings growth, leveraging on its existing resources, and expanding into new verticals - automotive, real estate and insurance sectors- to further widen its defensive stronghold and capture new markets.

• The group will also streamline the operations and maximise synergies of its recent bolt-on acquisitions i.e. RAM Holdings and Juris Technologies. These new additions provide CTOS with cross-selling opportunities as well as capabilities to innovate new products and enhance its existing offerings.

• Well-positioned to ride on the emerging trend of digital banking and financial services, CTOS is expected to drive the need for real-time credit decision process and alternative consumer data. CTOS allocates sizeable capex to upgrade its analytics and decision-making platforms, adding value to its propositions in the digitalised economy.

• Driven by multifaceted growth opportunities, the group’s FY22FFY24F earnings CAGR of 43% will be backed by healthy revenue growth of 18% FY22F-FY24F CAGR and improving EBIT margin trend from a gradual pick up in operating leverage.

• The key account segment will continue to be the main earnings growth driver, following the onboarding of new customers (i.e. digital players) and increase in existing customers’ share of wallet from enlarged product offerings – thanks to synergistic benefits of recently acquired capabilities, together with full-year associate contributions (+50%) in FY23F.

• The stock currently offers attractive valuations with an unjustified PEG ratio of 1.1 vs. global peers of 4.3.

Source: AmInvest Research - 7 Dec 2022