We initiate coverage on CTOS with a BUY call and a DCF-derived target price (TP) of RM2.45/share (discount rate: 5.9%, TG: 3.5%). This implies a FY22F P/E of 74x, which is at a premium compared to its global CRA peers’ average FY22F and FY23F forward P/E of 34x. This is to reflect its higher EPS growth rates of 27% and 26% in FY21-22F (vs. an average of 12% and 10% for its global peers). We like CTOS due to the following reasons: i) the bright prospects of the ASEAN Credit Reporting Industry; ii) its position as the leading CRA in Malaysia with an estimated market share of 71.2% in 2020; iii) its long-term relationships with its customers, with three decades of history with domestic banks and financial institutions; and iv) the exceedingly high-barrier of entry nature of business.

Robust growth of the ASEAN Credit Reporting Industry. IDC forecasts that the credit reporting industry in the ASEAN region will grow at a CAGR of 10.8% between 2021 and 2025 to RM1.61bn from RM1.07bn in terms of value. This would stem from the CRAs’ heightened penetration and usage of credit reporting services in current sectors and further expansion into new verticals such as automotive, healthcare, media, software and professional services, and the public sector in the ASEAN region.

Innovative digital solutions to drive expansion into new verticals domestically. CTOS aims to expand its footprint to new verticals in Malaysia, focusing on the automotive, insurance and the real estate sectors via innovative digital solutions. According to IDC, the total addressable market for the credit reporting industry for the three sectors is set to grow at a CAGR of 67.3%, 43.7% and 43.2% respecti vely from 2021 to 2025. In terms of combined value, the total addressable market for the credit reporting industry is forecasted to balloon to RM128.9m in 2025 from RM25.1m in 2021, which implies a CAGR of 50.6%.

High stickiness to its customers. In Malaysia since 1992, CTOS has enabled direct integration of its database with the systems of some of the financial institutions which had subscribed to its credit reporting services. With three decades of long-serving history with domestic banks and financial institutions, CTOS’ wide array of products and digital solutions, along with its scoring system, allows it to provide a one-stop digital solution for most of the daily operations of the retail and commercial banking industry. This makes its services an integral part of most of its customers’ business processes, with reliance and stickiness being developed over a long period of time.

Steady revenue and cash flows from diverse client base with long-term and strong customer relationships. Over the years, CTOS has developed long-term relationships with its customers, including banks, telco companies and other corporate customers. We gather that CTOS’ products and services have become an integral part of its customers’ business processes, making it difficult for them to switch to solutions offered by another CRA competitor. About 75% of CTOS’ Key Accounts customers’ revenues are recurring in nature and CTOS has retained 100% of its Key Accounts customers since 2017. CTOS’s top 5 customers have been the group’s client for a remarkably long period, ranging from 12 to 19 years.

Initiate with a BUY, TP: RM2.45/share. We initiate coverage on CTOS with a BUY recommendation and a DCF-derived TP of RM2.45/share (discount rate: 5.9%, TG: 3.5%). This implies a FY22F P/E of 74x, which is at a premium compared to its global CRA peers’ average FY22F forward P/E of 34x. We believe that the valuation premium is justified as we are expecting CTOS to grow faster than its peers, with an FY21-22F growth of 27% and 26% respectively (vs. an average of 12% and 10% for its global peers).

Source: Hong Leong Investment Bank Research - 16 Dec 2021