CTOS’ 2Q22 core earnings rose 63% YoY, backed by higher revenue, associate income, and lower net finance cost. Overall, results were within estimates and hence, our forecasts were unchanged. We continue to like the company for its market leadership, strong economic moat, and highly scalable business model. Also, in our view, the recent price pullback is a good opportunity to accumulate the stock. Maintain BUY rating and FCFF-TP of RM1.70, based on an implied 45x FY23 P/E.

Within estimates. After stripping away acquisition costs and income tax adjustments, CTOS posted 2Q22 core net profit of RM22m (+34% QoQ, +63% YoY), bringing 1H22 sum to RM38m (+45% YoY). This came in line with estimates, accounting for 48-52% of our and consensus full-year forecasts.

Dividend. 2nd DPS of 0.59sen was declared (2Q21: 0.533sen), bringing 1H22 DPS to 0.92sen (1H21 not comparable since only listed in Jul-21). Ex-date: 15th Aug.

QoQ. Although revenue grew 9%, core bottom-line rose by a quicker 34%, thanks to positive operating leverage (core EBIT increased 15%) and higher associate income (doubled given full quarterly contribution from Juristech and stronger gains from BOL). At the top, robust segmental performance by: (i) Key accounts +15%, (ii) Commercial (Domestic) +5%, and (iii) Direct-to-consumer +19%, were slightly capped by the weak Commercial (Foreign) -9% division.

YoY. Similarly, the 63% rise in core earnings were fuelled by higher revenue (+23% as all segments showed growth), associate income (tripled, thanks to strong financial performance by BOL and the acquisition of Juristech), together with lower net finance cost (-59% due the borrowings fully settled with IPO proceeds).

YTD. Like YoY showing, core profit (+45%) was lifted by the jump in revenue (+18%), associate income (doubled), and lower net financing cost (-75%). Notably, the growth drivers for the above three items were also similar to YoY performance.

Outlook. The pick-up in economic activities is good for CTOS given stronger volume of credit and trade transactions. Cumulatively till end-May, loans application rose 6% YoY. Also, the gradual expansion into new verticals and emergence of digital banks will help to boost revenue growth in the short and medium term. That said, bottom-line is seen to grow faster, thanks to its newly acquired 49% associate company, Juristech (10 months contribution in FY22) along with RAM’s potential profit inclusion, through equity accounting. For longer-term prospects, it is also bright, in our view, considering the industry is under penetrated where ASEAN credit reporting revenue per capita is some 38-56x smaller than developed nations like the US and UK.

Forecast. Unchanged as CTOS’ 2Q22 results were within expectations.

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 22x 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 - 27 Jul 2022