CTOS has proposed three corporate exercises, namely: (i) a 49% acquisition of Juris Technology Sdn Bhd for RM205.8m; (ii) a 2.25% acquisition of Business Online Public Company Limited (BOL) – which would increase its stake to 24.90% (from 22.65% previously) for RM34.9m; and (iii) a private placement of new shares of approximately 6.2% of its outstanding shares at an indicative issue price of RM1.763/share, which would raise RM240.7m to fund the acquisitions mentioned above. Overall, we are positive on the development as it would enhance CTOS’ FY22F EPS by about 5%, based on our estimates. As of now, we make no changes to our earnings forecasts, pending completion of the corporate exercises. Maintain BUY with an unchanged DCF-derived TP of RM2.45 (discount rate: 5.9%; TG: 3.5%).

NEWSBREAK

CTOS has proposed three corporate exercises, as follows:

1) It is acquiring a 49% stake in Juris Technology Sdn Bhd for RM205.8m from Natsoft (M) Sdn Bhd. Juris Technology is a Malaysian Financial Technology (Fintech) company that serves most major banks in Malaysia specialising in predictive artificial intelligence module, debt collection software, loan origination management, credit scoring solution, plus conveyancing and loan documentation systems. It was awarded with a multimedia super corridor (MSC) status in 2003.

2) It is acquiring an additional 2.25% stake in Business Online Public Company Limited (BOL) for an indicative amount of THB276.9m (or RM34.9m) from the open market or through direct negotiations with potential sellers over a period of 12 months.

3) Proposed a private placement of new shares of approximately 6.2% of its outstanding shares or 136.5m shares at an indicative issue price of RM1.763/share. The RM240.7m proceeds from this exercise will be earmarked for the acquisitions mentioned above.

HLIB’s VIEW

49% Juris Technology Acquisition:

1) As at 10M21, Juris Technology Group (Juris Technology and Juris Solutions) recorded a profit after tax (PAT) of RM12.0m. Based on our back of the envelope calculation, the annualised FY21 PAT for the group would be about RM14.4m.

2) The price tag of RM205.8m for a 49% equity stake in the group would translate into a FY21F P/E multiple of 28.5x, based on our estimates. Given that there are no direct listed peers, we deem the acquisition to be inexpensive when compared to current valuations of other listed fintech companies such as Revenue Gro up (46x) and GHL Systems (40x), based on consensus FY21F earnings estimates.

3) Overall, we are positive on this development as it is going to be value accretive considering the current FY21F forward P/E of CTOS (52x) is higher than the acquiring FY21F P/E of Juris Technology (28.5x).

4) Assuming zero growth, the 49% stake will boost CTOS’ FY22F core earnings by RM7.2m.

Additional 2.25% Stake in BOL:

1) The aggregate price tag of THB276.9m (not more than THB15.00/share) or RM34.9m for a 2.25% stake in BOL would translate into 53x FY21F earnings, based on consensus earnings estimates. This would be at a slight discount to current market price of THB15.60/share.

2) The additional acquisition will increase CTOS’ strategic investments in BOL to 24.90% (from 22.65% previously). Based on consensus earnings estimates, this additional 2.25% stake will boost CTOS’ FY22F core earnings by THB6.9m (or RM0.87m).

3) We are slightly negative on this development as we deem the deal to be a tad bit expensive and would only be very mildly accretive to CTOS’ profits.

Proposed private placement. We highlight that both acquisitions are to be financed by the proceeds of a proposed private placement of new shares of approximately 6.2% of its outstanding shares or 136.5m shares at an indicative issue price of RM1.763/share. This exercise would raise about RM240.7m.

Impact on EPS. Ex-all, the entire development would enhance CTOS’ FY22F EPS by about 5%, based on our estimates. Our estimates reflect: (i) the full dilution from the enlarged share base of 2.34bn shares arising from the private placement; and (ii) about RM8.1m contribution at the net level from the acquisition both 49% equity stake in Juris Technology and 2.25% stake in BOL. Overall, we are net positive on the entire development.

Still in net cash position. Following the three corporate exercises (where a private placement would be undertaken to fund both acquisitions), CTOS’ would maintain its net cash position of RM14.1m. We believe that this, to some degree, is an inefficient use of its capital structure.

Outlook. We like CTOS for the following reasons: (i) we believe that it is poised to ride on 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 over three decades of history with domestic banks and financial institutions; and (iv) the nature of its business which has an exceedingly high barrier to entry.

Forecast. We make no changes to our earnings forecasts, pending completion of the corporate exercises and more updates from management.

Maintain BUY, TP: RM2.45/share. We maintain our BUY recommendation on CTOS with 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 - 27 Dec 2021