KUALA LUMPUR (March 13): CTOS Digital Bhd’s share price rebounded on Wednesday after analysts said the recent sell-off was overdone, following management’s reassurance that the continuity of its operations was not at risk.

The uncertainty of operations came on the heels of the High Court’s recent ruling against CTOS’ wholly owned unit CTOS Data Systems Sdn Bhd (CDS) in a negligence and breach of fiduciary duty suit. The court ruled that CDS had overstepped its statutory functions under the Credit Reporting Agencies Act 2010 in formulating a credit score as the company was merely a database of credit information for its subscribers.

CTOS rose as much as 5.6% to an intraday high of RM1.32 on Wednesday, after plunging over 13% the previous day. The counter then eased to close at RM1.28 — still up three sen or 2.4% — which translates into a market capitalisation of RM2.96 billion. Some 71.02 million shares changed hands.

Following a recent briefing with CTOS’ management, RHB Research opined that the stock’s share price sell-down was overdone. The research house said it was an opportunity to invest in a top credit reporting agency with a recession-proof business and growth avenues in the digitalisation age.

Maybank Investment Bank Bhd assessed that regulatory risks to CTOS' business are currently contained, leading the research firm to upgrade its recommendation from “hold” to “buy”.

“….It is our opinion that the answers provided by management in relation to its business continuity were satisfactory. We take comfort in management’s comments post-discussion with their legal counsel that despite the legality of CTOS’ business continuity being called into question as part of the judge’s comments, it may not be used as precedent in future litigation,” said Maybank.

Seven analysts have assigned a “buy” recommendation on CTOS, three suggested “hold”, and one rated it a “sell”, with the 12-month median target price for the stock at RM1.69, Bloomberg data showed.

The High Court last week decided in favour of a businesswoman, Suriati Mohd Yusuf, who sued CTOS’ wholly owned unit CTOS Data Systems Sdn Bhd (CDS) for negligence and breach of fiduciary duty.

Judge Datuk Akhtar Tahir, in his judgement, said that based on evidence that CDS was alerted of the inaccurate information but chose to ignore it, the credit reporting agency was deemed to have breached its duty of care owed to Suriati. He ordered CDS to pay her RM200,000 together with RM50,000 in costs.

Kenanga the only house with an 'underperform' call

Kenanga Investment Bank noted that the court’s ruling still poses a challenge to CTOS’ business model until it is overturned by a “higher court”, which could take up to three to six months.

“While there could be merit to the group’s legitimacy in offering key credit scoring solutions, we believe the elephant in the room still stands, ie the court’s interpretation that poses a challenge to CTOS’s business model,” said Kenanga, which maintained its “underperform” call.

If CTOS were to discontinue its credit scoring business, Hong Leong Investment Bank and RHB estimate a significant negative impact on the group's earnings for the financial year ending Dec 31, 2024 (FY2024) by 30% and 26%, respectively.

For FY2023, CTOS' net profit surged 65.05% to RM118.37 million from RM71.72 million as revenue climbed 34.22% to RM261.44 million from RM194.78 million in FY2022.