We came away feeling neutral from CTOS’ analyst briefing yesterday. While we understand that the approval of the tax-relief pioneer status has been delayed for about 2 quarters already, the group is expecting a positive outcome by 1Q22. Meanwhile, we also believe that CTOS would be a key beneficiary of the digital banking initiatives by Bank Negara Malaysia as the entire ecosystem is expected to be more catered towards the underserved and unserved banking population – which will inevitably require more credit reporting assessments. 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%).

Renewal of Pioneer Status. CTOS has already filed in to MDEC for the continuation of the tax incentives of CTOS Data System’s pioneer status for an extended period for another five years until Nov 2026. The group is expecting a positive outcome by 1Q22. We note that the approval has already been delayed for about 2 quarters.

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. We understand that the private placement is expected to be completed soon, before the upcoming EGM on 7 Feb 2022.

To benefit from digital banking initiatives. Bank Negara Malaysia (BNM) is looking to roll out five digital banking licenses in 1QCY22 to hasten the penetration of innovative banking technology and boost financial inclusion by targeting the underserved and unserved banking population. We understand that SMEs contribute to about 50% of Malaysia’s GDP, would be one of the largest beneficiaries of digital banking. Digital banks is also expected to be more borrower-centric with more tailored customer solutions, faster approvals and disbursement of funds, simplified lending management and competitive rates. We believe this would also ultimately benefit CTOS from two perspectives: (i) greater penetration into the local credit reporting market with more credit reporting assessments required for lending to the underserved and unserved banking population; and (ii) increased volume with faster approvals and disbursement of funds from digital banks.

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 as we await the completion of all the corporate exercises – i.e. Juris Group and the ongoing private placement.

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 - 26 Jan 2022