Investment Highlights

• We maintain a BUY recommendation on CTOS Digital Holdings (CTOS) with an unchanged SOP-based fair value (FV) of RM1.80/share. We ascribe a 4-star ESG rating to the company, which adds a 3% premium to our FV.

• We made no changes to FY23F-25F earnings as CTOS’ FY22 results were largely in line with our expectation and consensus. The group’s FY22 normalised PATAMI of RM85mil (+53% YoY) was 2% above our forecast and 1% of consensus. In tandem with that, FY22 revenue of RM195mil (+27% YoY) came in 3% above our forecast of RM189mil.

• All 4 key categories of the company’s customers (key accounts, commercial, commercial – international, and direct-to-consumer (D2C)) reported higher sales in FY22 with key accounts (38% of total revenue) and commercial (47% of total revenue) continuing to be the main revenue contributors.

• Key accounts’ 4Q22 revenue remains resilient (+5% QoQ, +50% YoY), mainly driven by robust demand for digital reports and digital solutions as well as increased adoption of eKYC, CAD and IDGuard offerings, which translate into higher transaction volumes. The segment is expected to continue to be the key growth driver following the growing focus on data analytics among its customers and increasing demand from fintech players.

• The commercial segment’s revenue grew 16% YoY, bolstered by higher transaction volume and average revenue per user (ARPU). The expansion of the group’s data assets and realisation of synergies from recent acquisitions are expected to boost the segment’s revenue moving forward.

• Separately, the D2C segment’s 4Q22 revenue grew 21% QoQ and 2.1x YoY, demonstrated by higher transaction volume of 3% QoQ and 2.7x YoY. This is bolstered by growing awareness among end-consumers through various marketing activities. As at end-2022, CTOS’ self-check user base has grown to 2.5mil from 1.7mil in 2021.

• Notably, CTOS’ EBIT margin deteriorated 20%-points QoQ to 22% in 4Q22. This is due to a one-off earned-out payment for Basis acquisition together with higher planned marketing expenses and staff costs.

• We continue to like the stock given its multipronged approach to drive future earnings growth through expansion into new verticals and maximising synergies of recent bolton acquisitions. The company is also well-positioned to ride on the emerging trend of digital banking and financial services.

• The stock is trading at an undemanding 34x FY23 PE, below its historical average of 41x since listing in July 2021.

Source: AmInvest Research - 2 Feb 2023