CTOS continues to be bullish on its outlook during the post-results briefing call yesterday. Overall, demand for its products is expected to stay strong, driving top-line growth. To further spur this, management looks to: (i) upsell and cross sell its products, (ii) tap into its digital ecosystem, (iii) enhance the coverage of alternative proprietary databases, (iv) expand into new verticals, along with (v) acquire value accretive and synergistic companies. Besides, management has received approval in principle by MDEC to extend its pioneer status. Separately, CTOS also kept their FY22-23 targets and hence, our forecasts were unchanged. We continue to like the stock for its market leadership, strong economic moat, and highly scalable business model. Maintain BUY call and FCFF-TP of RM1.70, based on an implied 45x FY23 P/E.

Yesterday, CTOS held its 2Q22 post-results briefing. Overall, management’s tone was bullish and they maintained their FY22-23 targets. We summarize the key-takeaways in this report.

Strong appetite for its products. CTOS shared revenue growth at its Key Accounts division (+15%/+40% QoQ/YoY) was lifted by stronger digital solutions. Also, they on boarded three large insurers and one bank, via rolling out its eKYC service. However, this move temporarily dragged down its GP margin by 2ppt/4ppt QoQ/YoY. Besides, sales at the commercial segment (+4%/+10% QoQ/YoY) saw strong activation growth and pursued upselling campaigns. Furthermore, there was ARPU enhancement from selective 6% price adjustments. Overall, CTOS kept its previous 10-15% growth target here as it sees stronger 2H22. Lastly, the impressive direct-to-customers segmental top-line (+19%/+48% QoQ/YoY) was led by higher penetration through strategic tie ups and improved awareness.

Growth strategies. Going forward, CTOS is looking to: (i) ride on BAU growth by up selling and cross selling its products in the large addressable market of their primary business units, (ii) amplify operating leverage via tapping into its deep and automated digital ecosystem by fortifying platform capabilities, data analytics, fraud and ID, (iii) enhance coverage of alternative proprietary databases to offer more comprehensive solutions, (iv) expand into new verticals such as automotive, fintech, insurance, and real estate, along with (v) acquire value accretive and synergistic companies.

Tax incentive update. Approval in principle by MDEC to extend its pioneer status i.e. the second 5-year tax incentive period from Nov-21 to Nov-26. Hence, there would be provision tax writeback of RM7.8m, considering that CTOS was earlier prudent with its accounting treatment and assumed no renewal.

Management targets intact. For FY22, CTOS is targeting revenue of RM185-195m (+20-25% YoY) and core earnings of RM75-80m (+25-30% YoY). As for FY23, CTOS is aiming top-line of RM275-290m (+45-53%) and core net profit of RM95-100m (+23- 29%); this assumes 55-60% RAM shareholding consolidation (owns 19.2% currently).

Forecasts. Our estimates were unchanged since its FY22 targets were kept.

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 - 28 Jul 2022