CTOS acquired an additional 3.5% stake in RAM Holdings Berhad. The RM7.6m consideration implies a TTM-PER of 26x, which is fair and in line with global peers. We think the increased stake will further incentivize cross-selling across CTOS and RAM, bringing revenue synergies. Maintain earnings estimates as immediate earnings accretion is insignificant, but leaves room for upside surprises on synergies. Upgrade to OUTPERFORM from MP on unchanged TP of RM2.00 on 55x FY22E PER, premised on the share price weakness and numerous growth catalysts.

Acquisition at fair price. To our surprise (as we weren’t expecting any more acquisitions in FY21), CTOS acquired an additional 3.5% stake in RAM (lifting total stake to 8.1%) from Standard Chartered Bank Malaysia Berhad for a total consideration of RM7.61m. This implies a share price of RM21.74, on par with the previous purchase price of RM21.84. Based on RAM's FY20A PAT of RM8.4m, that implies a TTM-PER of 26x, which we think is fair and in line with other listed credit rating agencies globally. The RM7.61m will be fully funded by the remaining RM21.8m IPO proceeds earmarked for acquisitions.

Greater incentive to cross-sell. With CTOS' additional stake in RAM, there is greater incentive for cross-selling between both parties. We think any offerings of existing RAM products or new hybrid products to CTOS' customers will fuel CTOS' earnings growth. Specifically, we think CTOS likely has a great interest to tap into RAM's sustainability ratings and services, given heightened ESG awareness in business and investment decisions.

Catalysts for continued growth. We see a buying opportunity in CTOS' recent share price weakness, which we attribute to: (i) concerns on CCRIS access (restored in November), (ii) softened market sentiment, (iii) concerns of share overhang pending moratorium expiry in Jan 2022. These short-term pressures present a good opportunity to accumulate CTOS, which has numerous long-term catalysts; one, greater demand for reports, fueled by a boom in eKYC across industries, as customers from financial institutions to e-payment providers look to fully onboard clients virtually, two, healthy appetite for M&As (including regional) to fuel earnings growth, and three, continued growth from new products in new sectors (auto, insurance and real estate).

Maintain estimates, as the earnings accretion from the 3.5% acquisition is insignificant, but we note that there is room for upside surprises, should any cross-selling drive faster-than-expected synergistic growth in CTOS' key accounts.

Upgrade to OUTPERFORM (from MP) on unchanged TP of RM2.00, as we see value at the current price. The share price correction has presented an attractive opportunity to own a scarce ASEAN-listed credit rating agency. The current price of RM1.77 implies a FY22E PER of 49.3x, compared to our ascribed 55x. CTOS continues to deserve a 55x PER for its: (i) market leader status with 71.2% share in an underpenetrated market, (ii) more robust industry growth (2021-25E CAGR of 13.2%) vs. developed nation peers (U.S.: 7.5%; U.K. 5.3%), and (iii) superior earnings growth of 60%~20% (vs. peers' 12-14%).

Source: Kenanga Research - 9 Dec 2021