CTOS’ 3Q22 core profit rose 79% YoY, backed by higher revenue and associate income. Overall, results were above expectations and hence, we raise FY22-24 earnings by 17-18%. 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. Retain BUY rating and FCFF-TP of RM1.70, based on an implied 38x FY23 P/E.

Above estimates. After stripping away acquisition costs and income tax adjustments, CTOS posted 3Q22 core earnings of RM26m (+21% QoQ, +79% YoY), bringing 9M22 sum to RM65m (+57% YoY). This was above estimates, accounting for 82-88% of our and consensus full-year forecasts; key variances came from stronger-than-anticipated revenue growth and income contribution from associates.

Dividend. 3rd DPS of 0.60sen was declared (3Q21: 0.32sen), bringing 9M22 DPS to 1.52sen (9M21 not comparable since only listed in Jul-21). Ex-date: 16th Nov.

QoQ. Core bottom-line rose by a quick 21%, given: (i) strong revenue growth (+14%), (ii) better sales mix, and (iii) positive operating leverage (core EBIT rose 29%). At the top, we saw robust segmental showing across all business divisions: (i) Key accounts +13%, (ii) Commercial (Local) +4%, (iii) Direct-to-consumer +2%, and (iv) Commercial (Foreign) +2-fold.

YoY. Similarly, the 79% jump in core earnings were fuelled by higher revenue (+37% as all business segments displayed growth) and associate income (tripled, thanks to strong financial showing by BOL, acquisition of Juristech, and additional RAM stake).

YTD. Like YoY performance, core profit (+57%) was lifted by the increase in revenue (+24%), associate income (tripled), and lower net financing cost (-62% given that prior borrowings were fully settled with IPO proceeds).

Outlook. The pick-up in economic activities is good for CTOS given stronger volume of credit and trade transactions. Cumulatively from Jul-Aug-22, loans application rose 65% YoY. Also, the 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) together with RAM’s profit inclusion, through equity accounting. For longer-term prospects, it is also bright, in our opinion, considering the industry is under penetrated where ASEAN credit reporting revenue per capita is 38- 56x smaller than developed nations like the US and UK.

Forecast. We raise FY22-24 earnings by 17-18% to reflect the strong set of results (higher revenue growth) and income contribution from RAM.

Maintain BUY and FCFF-TP of RM1.70, despite the earnings increase as we build in higher risk free rate into our valuation. The TP implies 38x FY23 P/E with assumptions of 8.3% WACC (from 7.9%) 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 (7ppt 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 - 28 Oct 2022