We came away feeling positive from CTOS’ analyst briefing yesterday – which mainly focused on the proposed acquisition of Juris Technology Group and the on-going private placement. The group expects the acquisition to be completed in 1QFY22 (after the EGM on 7 Feb 2022) and the private placement to conclude within the next two weeks. We reiterate our positive view as the developments would enhance CTOS’ FY22F net profit by about RM9.5m. 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%).

Update on recent proposed acquisitions. Recall that CTOS has proposed two acquisitions on 24 Dec 2021: i) a 49% equity stake in Juris Technology Group for RM205.8m cash; and ii) 2.25% equity stake in BOL for approximately RM34.9m cash. We understand that the acquisition of Juris Tech is slated for completion in 1QFY22, pending shareholders’ approval in the upcoming EGM (which would be held on 7 Feb 2022).

Private placement to be completed soon. Also on 24 Dec 2021, CTOS has 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 to raise RM240.7m for the acquisitions mentioned above. Management has guided that the private placement would be completed within the next two weeks. However, as CTOS’ share price has risen following the announcement, the amount of new issued shares may be lower than 6.2%, resulting in lower-than-expected dilution.

More on Juris Technology Group. Juris Technology is a leading Malaysian-based fintech player specialising in software solutions for financial institutions. It has a strong entrenched market position in Malaysia and overseas presence in 4 countries, namely Singapore, Brunei, Australia and UAE. Its client portfolio consists of more than 50 reputable corporations and 3,000 agencies consisting of leading financial institutions, banks, development funds and multi-national corporations (Figure 1). We highlight Juris’ business is also highly cash-generative in nature – with approximately 65% of its total revenue stream being recurring (Figure 2).

Contribution to CTOS’ profits. The group is expecting that Juris’ revenue and profit after-tax growth in FY22F to be more than 20%. The group also guided that the 49% acquisition of Juris Tech would immediately contribute an additional 13% to CTOS’ FY22F net profit – about RM9.5m based on our estimates.

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 all the corporate exercises.

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 - 11 Jan 2022