CTOS’ 4Q22 core profit rose 51% YoY, backed by higher revenue (all business divisions showed growth) and associate income (larger share contribution from RAM and JurisTech). Overall, results were within estimates and hence, we keep our forecasts unchanged. Despite potentially slower economic growth, we still believe CTOS will grow at a quick rate given its defensive business model that has resilient revenue streams (more risk assessments during a downturn) along with expansion into new verticals and emergence of digital banks. Moreover, we like CTOS for its market leadership, strong economic moat, and highly scalable business model. Keep BUY rating and FCFF-TP of RM1.70, based on an implied 38x FY23 P/E.

Within estimates. After stripping away acquisition costs and income tax adjustments, CTOS posted 4Q22 core earnings of RM21m (-22% QoQ, +51% YoY), bringing FY22 sum to RM85m (+56% YoY). This was in line with expectations, making up 99 -102% of our and consensus full-year forecasts.

Dividend. 4th DPS of 0.36sen was declared (4Q21: 0.33sen), which brings FY22 DPS to 1.88sen (FY21 not comparable since only listed in Jul-21). Ex-date: 20th Feb.

QoQ. Core bottom-line fell 22%, given: (i) flattish revenue growth, (ii) less favourable sales mix, along with (iii) higher planned marketing campaigns and staff costs. At the top, we saw growth for majority of its business segments: (i) Key accounts +6%, (ii) Commercial (Domestic) +2%, and (iii) Direct-to-consumer +4%, save for Commercial (Foreign), which fell 35%.

YoY. The 51% increase in core earnings were fuelled by higher revenue (+36% as all business divisions displayed growth) and associate income (+5 -fold, thanks to larger share of contribution from RAM and JurisTech).

YTD. Like YoY performance, core profit (+56%) was lifted by the increase in revenue (+27%), associate income (tripled), and lower net financing cost (-28% given that prior borrowings were fully settled with IPO proceeds).

Outlook. Even though we are seeing slower economic growth, we still believe CTOS will grow at a quick rate given its defensive business model that has resilient revenue streams (more risk assessments during a downturn). Besides, the expansion into new verticals and emergence of digital banks will help to boost revenue growth in the short and medium term. Also, RAM’s full-year profit inclusion (through equity accounting) at a larger 57.7% stake in FY23 would augment bottom-line. For longer-term prospects, it is also bright, in our view, considering the industry is underpenetrated where ASEAN credit reporting revenue per capita is 38-56x smaller vs developed nations (US, UK).

Forecast. Unchanged since 4Q22 results were within expectations.

Maintain BUY call and FCFF-TP of RM1.70, based on an implied 38x FY23 P/E with assumptions of 8.3% WACC and 5.0% TG. This is above global peers’ average (GPA) of 24x and their 5-year mean of 28x. The premium is fair given its bright outlook and more robust profit growth profile (6ppt 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.

Source: Hong Leong Investment Bank Research - 2 Feb 2023