CTOS is proposing to acquire Oscar Matrix’s 19.9% stake in RAM for RM51.3m. Also, it is eyeing to buy up to an additional 30.9% interest from remaining RAM shareholders. Overall, no surprises and we are positive on the deal since it is attractively priced and accretive in nature. Moreover, RAM fits nicely into CTOS’ broader business plan (see report dated 22 Jun-22, titled ‘Eyeing a bigger stake in RAM’). Our forecasts were kept unchanged, pending deal completion. We still like CTOS for its market leadership, strong economic moat, and highly scalable business model. Thus, we view the recent price pullback as a good opportunity to accumulate the stock. Retain BUY call and FCFF-TP of RM1.70, based on an implied 45x FY23 P/E.

NEWSBREAK

CTOS is proposing to acquire the 19.9% RAM stake belonging to Oscar Matrix (wholly owned by Creador) for RM51.3m cash consideration (RM25.80/share). Also, CTOS is eyeing to acquire up to an additional 30.9% interest in RAM from remaining owners at a price tag of not more than RM28.50/share. Currently, CTOS has a 19.2% stake.

HLIB’s VIEW

In line with guidance. No surprises as this was in line to what was communicated to the investment fraternity earlier where Oscar Matrix’s 19.9% stake will be priced at a 10% discount vs the offer to remaining shareholders of RAM; the idea and intention is to maintain investors’ confidence, since it is a related party transaction.

The deal is attractive, in our opinion, seeing that RAM is priced at 18.4x P/E, a 23% discount to the other listed global credit rating agencies average of 23.9x. Also, it is an accretive acquisition (looking at CTOS’ higher valuation of 37.9x) despite financed by loans (assuming a 4% cost of debt).

On top of that, we understand RAM has capacity to dish out special dividends since it could monetize investment properties worth RM67m and has cash equivalent coffers of RM131m (a combined value of RM19.80/share). If materialize, it will help CTOS to offset some of its acquisition cost.

Notably, none of RAM’s profits have been captured into CTOS’ P&L as it is not equity accounted yet. Based on a 39.1% stake (19.2% existing + 19.9% Oscar Matrix) along with a 4% debt cost, we estimate RAM could add 4-5% to CTOS’ FY22-23 earnings.

Forecast. Unchanged, pending completion of the deal.

Maintain BUY and FCFF-TP of RM1.70, based on an implied 45x FY23 P/E with the assumptions of 7.9% WACC and 5.0% TG. This is above global peers’ average (GPA) of 21x and their 5-year mean of 28x. The premium is fair given its bright outlook and more robust profit growth profile (4ppt higher vs GPA), backed by the underpenetrated ASEAN market. Moreover, we like CTOS for its leadership position, strong economic moat, and highly scalable business model. Hence, we view that the recent share price pullback as a good opportunity to accumulate the stock.

Source: Hong Leong Investment Bank Research - 18 Jul 2022