Investment Highlights

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

• Our FY23F-25F earnings are maintained as 9MFY23 earnings came within expectations accounting for 72% of both ours and consensus’s estimates.

• YoY, 9MFY23 revenue rose by 33% mainly due to robust growth from all business segments. Higher revenue from key accounts (+56% YoY) and direct-to-consumer (D2C) (+51% YoY) segment were mainly driven by stronger demand for digital solutions and comprehensive portfolio review/analytics services. 9MFY23 net profit increased by 17% YoY mainly due to better contribution from comprehensive portfolio review/analytics services and higher profit share from associates (+24% YoY).

• QoQ, 3QFY23 net profit surged by 15% thanks to higher growth from key accounts and commercial business segments in Malaysia. This more than offset a slight loss in commercial business from international operations.

• Moreover, we continue to hold a positive outlook on the stock, owing to CTOS' multifaceted approach to driving future earnings growth. Associates continued to contribute significantly by increasing new solutions and expansion of clientele base to 12 with its new digital lending platform for moneylenders. We understand that the group is prospecting for 5 new clients for the platform, which is a collaboration with Juris Tech. Additionally, CTOS is well-positioned to capitalise on emerging trends in digital banking and financial services.

• CTOS continues to focus its growth on the key account segment by increasing adoption of digital solutions (eKYC, CAD and IDGuard) resulting in a total of 135 clients onboarded as at 3QFY23. We understand CTOS will also cross sell digital solutions to existing customers to strengthen its revenue base.

• CTOS also completed the acquisition of Finscore and Prime Analytics in October 2023. This strategic move by CTOS is poised to enhance its market presence in the Philippines and Indonesia, offering an extensive range of credit-related products and services. We are optimistic on the potential impact of these acquisitions, and have factored in their anticipated incremental contributions to our FY24F earnings.

• On a brighter note, the company received Ministry of Finance’s approval for 2nd 5-year extension of tax exemption from Nov 2021 until Nov 2026. The group has announced a likely reversal of RM27.8mil in tax provisions in 4QFY23 subject to finalisation of tax computation.

• Third interim dividend of 0.64 sen/share has been declared bringing the 9MFY23 dividends to 1.6 sen/share (payout: 64%).

• The stock is trading at an undemanding 26x FY24F PE, below its 5-year mean at 35x.

Source: AmInvest Research - 30 Oct 2023