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’ 1QFY23 results were largely in line with our expectation and consensus. The group’s normalised 1QFY23 net profit of RM21mil (+1% QoQ, +23% YoY) accounts for 20% of our full year FY23F estimate and consensus.

• Our core earnings calculation excludes incremental income tax expense of RM4mil, which recognised the statutory tax rate of 24% despite tax exemption being granted under Pioneer Status incentives pending the gazettement of Income Tax Exemption Order.

• In tandem with the bottom line, revenue contribution from its core operation is also in line with our estimate. Revenue of RM60mil (+13% QoQ, +40% YoY) reported during the quarter made up 24% of our FY23F estimate.

• All 4 key categories of the company’s customers (key accounts, commercial, commercial – international, and direct-to-consumer (D2C)) reported higher sales in 1QFY23 compared to the preceding year. Key accounts and commercial segments remain the main revenue contributors, accounting for 43% and 48% of total revenue, respectively.

• 1QFY23, revenue from key accounts (+13% QoQ, +40% YoY) and D2C (+60% QoQ, 63% YoY) remain resilient, mainly driven by robust demand for CTOS Data Systems Reports, digital solutions and portfolio review/analytics services. This segment is expected to continue to be the key growth driver given the growing focus on data analytics among its customers and increasing demand from fintech players.

• However, the group’s earnings were dragged by the decline in associates’ share of profit (-74% QoQ, -8% YoY), which mainly derived from Juris Technologies and RAM Holdings’ contributions.

• Nevertheless, 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 bolt-on acquisitions. The company is also wellpositioned to ride on the emerging trend of digital banking and financial services.

• The stock is trading at an undemanding 29x FY23F PE, below its historical average of 38x since listing in July 2021.

Source: AmInvest Research - 18 Apr 2023