KUALA LUMPUR (Nov 12): CTOS Digital Bhd (KL:CTOS) shares climbed as much 7.9% or nine sen on Tuesday after the group posted a 13% rise in its third quarter net profit on a record high revenue, though the results were deemed a miss by Kenanga Research and Hong Leong Investment Bank (HLIB), who lowered their target prices (TPs) for the stock.

CTOS shares closed at RM1.22, still eight sen or 7% higher, for a market capitalisation of RM2.82 billion, after 11.3 million shares were traded. The group on Monday announced a net profit of RM27.55 million for its third quarter ended Sept 30, 2024 (3QFY2024), as revenue climbed 20.1% to RM79.81 million. It also declared a third interim dividend of 0.84 sen per share.

"Despite some margin recovery in 3QFY2024, CTOS's 9MFY2024 core net profit was below expectations due to moderating growth in digital report volumes, with margins slightly diluting. Notwithstanding its inroads into new digital banks and new sign-ups for e-KYC (know your customer), revenue risk was flagged as financial institutions, including banks' credit review cycles appear to be less frequent, necessitating the group to trim its revenue and profit guidance," Kenanga wrote in a note to clients on Tuesday.

This led it to lower its earnings forecasts for CTOS for FY2024 by 6% and for F2025 by 15%, and to cut its target price for the stock to RM1.70 from RM2, though it kept an 'outperform' call on the stock, while noting that dividend ratio for the group's 9MFY2024 payout was at 71% versus 9MFY2023's 65%.

Likewise, HLIB noted that the results were a miss after stripping away income tax adjustments and employee share option scheme (ESOS), with a core bottom line of RM28 million, which it said is up 8% quarter on quarter but down 4% year on year, bringing its 9MFY2024 tally to RM75 million — flat year on year — as its higher revenue was offset by a compression in gross profit margin, higher operating expenses and increased net finance costs from its new international business.

"This forms only 66%-67% of our and consensus full-year forecasts. The variance came from softer-than-expected revenue given contract delay at its key accounts segment," HLIB wrote in a separate note, as it cut its profit estimates for its FY2024 to FY2026 between 6% and 7%.

While HLIB noted that the profit miss was "unpleasant and management guidance was off two quarters in a row", it still upgraded the stock to 'buy' as it believes the stock's risk-reward profile is now skewed more favourably to the upside as it reckoned those negatives have been broadly priced in after CTOS's share price fell 28% from its peak this year. But it cut its TP to RM1.45 from RM1.55 previously, based on an implied 27 times its FY2025 price earnings.

For RHB Research and Maybank Investment Bank (Maybank IB), CTOS' results were within their expectations.

"We expect a stronger 4Q2024, buoyed by new project recognition and a seasonally strong run rate... We like CTOS Digital for its long growth runway, with a recession-proof business model against the backdrop of the secular digitalisation trend, as well as the growth in financial and credit-related solutions in Asean," RHB wrote in another note.

Still, RHB trimmed its TP for the stock to RM1.58 from RM1.73, though it kept it at 'buy'. It also kept its FY2024 net profit forecast unchanged but lowered its FY2025 and FY2026 earnings estimates by 11% and 9% respectively, after factoring in slower-than-expected revenue growth and higher cost assumptions.

"Management trimmed its FY2025F guidance on earnings to RM125 million to RM130 million from RM150 million to RM160 million, mainly on a more cautious growth outlook from the implementation of the sales cycle for its new digital solutions and commercial segment, coupled with additional expenses in relation to a higher headcount and expanding regional marketing efforts. Management remains confident on its growth trajectory, with a huge total addressable market of RM2.7 billion (penetration rate of 10%-15%) based on current offerings," it noted.

Maybank IB, however, kept its earnings forecast for the group for FY2024 to FY2026, and anticipates a strong end to its FY2024 on another record quarterly turnover, underpinned by a previously deferred key account project, renewed commercial optimism, continued double-digit international growth momentum, and stronger associate contributions from JurisTech and RAM Holdings.

"The recent share price correction, coupled with undemanding valuations (trading at circa 19 times FY25E price earnings ratio) provides an opportunity to accumulate a niche service provider with a dominant market share in an underserved yet rapidly growing industry," Maybank wrote in a separate note as it recommended a 'buy' on the stock with a TP of RM1.65.

The stock has an average TP of RM1.65, based on 11 research houses who covered the stock and had it either on 'buy' or 'outperform', except for Macquarie, who placed it on 'underperform'.