Considering share price has skidded 15% YTD, we find that CTOS’ risk-reward profile has become even more attractive and reckon it is a good opportunity to accumulate the stock. We like the company for its market leadership position, strong economic moat, and highly scalable business model. Also, CTOS is well placed to capture future opportunities with significant balance sheet headroom and liquidity. We forecast FY22-24 profit to rise by 17-22%. Maintain BUY with a refreshed FCFF-TP of RM1.95 (from RM2.45), based on an implied 52x FY23 P/E.

Following a broad tech sell-off in anticipation of increasing interest rates, CTOS’ share price has declined 15% YTD. With this and change of analyst coverage, we reassess CTOS’ investment thesis and risk-reward profile.

Strong organic growth prospects. We still like the huge growth opportunity that the ASEAN credit reporting market has to offer. We find currently it is an under penetrated industry where credit reporting revenue per capita here is some 38 -56x smaller than developed nations like the US and UK. Being a leader with dominant market share (at >50%, measured by revenue), we believe CTOS will continue to capitalize and ride on the strong demand wave for credit reporting, driven by: (i) rising financial literacy, (ii) SME expansion, and (iii) emergence of digital banking. According to IDC, the market size of its operating countries, Malaysia and Thailand, are projected to expand at a 4- year CAGR of 13.2% and 6.6% respectively from FY21-25.

Winning business model. Despite a market leader and already offering wide array of products and services, we applaud CTOS for not resting on its laurels. The comp any has strong focus for product development and is looking to expand into new verticals such as the automotive, real estate, and insurance sectors. Overall, we like its hungry attitude and highly scalable business model. However, CTOS is also fairly aggressive in pursuing inorganic growth, observing the string of acquisitions it made over the past 3 years (BOL, RAM, Juristech). While we can appreciate the quick boost to bottom line, continuous acquisition diligence must be exercised to prevent FCF wastage and avoid frequent cash calls. Besides, we prefer to see positioning into more meaningful controlling stakes to better unlock full synergistic potential of any future acquisitions.

Forecasts. We are projecting FY22-24 profit to rise by 17-22%; this is after factoring in the recent purchase of Juris (49% stake) and BOL (2.175% stake), which boosted growth upwards by 4ppt. Also, we assumed the MDEC tax incentives will be renewed (without this, it would shave 20% off our current earnings projection). Wh en stacked against the estimates of our previous analyst, the upcoming 3-year profit forecasts are comparable, with a mere <5% variance. Separately, we note that both the acquisitions mentioned above would cost a total of RM232m where the split between equity/debt funding is 75%/25%. Accordingly, CTOS is expected to be in a slight net debt position again in FY22 before returning to a net cash company in FY23. As such, we like that it has ample of balance sheet headroom to expedite business strategies.

Maintain BUY with a refreshed FCFF-TP of RM1.95 (previously: RM2.45), based on an implied 52x FY23 P/E with assumptions of 7.6% WACC and 5.0% TG. This is above global peers’ average (GPA) of 23x. The premium is warranted given its bright prospects and more robust profit growth profile (4ppt higher vs GPA), backed by the under penetrated ASEAN market. Moreover, we like CTOS for its leadership position, strong economic moat, and highly scalable business model. In addition, the company is well placed to capture future opportunities with significant balance sheet headroom and liquidity. Hence, we view the recent share price pullback as a good opportunity to accumulate the stock.

Source: Hong Leong Investment Bank Research - 13 Apr 2022