CTOS proposed to buy the 15.7% and 0.8% RAM stakes belonging to Dragonline Solutions and Deutsche Bank for cash consideration of RM44.6m and RM2.3m respectively. 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 YTD price pullback as a good opportunity to accumulate the stock. Retain BUY rating and FCFF-TP of RM1.70, based on an implied 45x FY23 P/E.

NEWSBREAK

CTOS is proposing to buy the 15.7% and 0.8% RAM stakes belonging to Dragonline Solutions and Deutsche Bank for cash of RM44.6m and RM2.3m respectively. These translate to RM28.50/share. The transaction is expected to complete by end Sep-22. Currently, CTOS has 39.1% stake and after the proposed acquisition, it would rise to 55.6%.

HLIB’s VIEW

In line with guidance. No surprises as this was in line to what was communicated to the investment fraternity earlier where any additional interest in RAM will be bought at a price tag of not more than RM28.50/share.

The deal is attractive, in our opinion, seeing that RAM is priced at 20.4x P/E, a 19% discount to other listed global credit rating agencies average of 25.1x. Besides, it is an accretive acquisition (looking at CTOS’ higher valuation of 44.9x) despite financed by loans (assuming a 4% cost of debt).

That said, we understand RAM has the 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 it materializes, it will help CTOS to offset some of its acquisition cost.

To note, we have not consolidated RAM’s profit into our financial model yet. Based on a 55.6% stake along with a 4% debt cost, we estimate RAM could add 4-5% to CTOS’ FY23 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 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 YTD share price pullback as a good opportunity to accumulate the stock.

Source: Hong Leong Investment Bank Research - 9 Sept 2022