CTOS has proposed to acquire a 49% stake in JurisTech and an additional 2.25% stake in BOL, both funded via a private placement. Positive on the deals, we deem the 23x FY21E PER valuation for JurisTech as fair, as its complementary services bring synergistic benefits to CTOS. Together, both deals would lift FY22E CNP by 7%, but the private placement, which would result in an enlarged share base, would dilute EPS by 6%. Thus, we raised FY22E EPS by only ~1%. We reiterate OUTPERFORM with unchanged fully-diluted TP of RM2.00 on 55x FY22E PER.

Largest acquisition since inception. Last Friday, CTOS proposed to: (i) purchase 49% equity stake in Juris Technologies (JurisTech) for RM205.8m, (ii) acquire an additional 2.25% of BOL (post-acquisition stake of 24.9%) for no more than RM34.9m, and (iii) fund said acquisitions via a private placement. While we didn't expect any more deals in 2021, the acquisition of JurisTech was no surprise, as management was seeking for synergistic acquisitions that would enable CTOS to expand its digital solutions offerings.

JurisTech synergies. JurisTech (incorporated in 2003) provides an end-to-end credit management platform that allows its clients (mainly banks and financial institutions) to digitally acquire customers, evaluate borrowers, approve loans and recover debt. Firstly, these complement CTOS' existing services of providing credit information and analysis to customers. Secondly, by combining JurisTech's software and CTOS' expansive database, the duo can jointly develop new digital lending solutions that include credit data, software and analytics services. Such services are popular given: (i) banks' increased digital transformation and enhancement requirements (e.g. e-KYC), and (ii) growing demand for data analytics solutions. Thirdly, CTOS and JurisTech can cross-sell to each other’s' customers.

Fair deal. CTOS is paying ~23x FY21E PER for JurisTech. There are no direct comparables for a FinTech like JurisTech, and its closest competitors are not listed. However, given the evident synergies and scalability of JurisTech's software services, we think the price is fair. Note that other listed global credit bureaus (not direct comparables) trade at ~40x FY21E PER.

(refer overleaf for more on additional BOL stake)

Funding via private placement. We assume the deals will be fully funded by a private placement of 136.5m new shares. At a 5-day VWAP of RM1.7630, CTOS could raise RM240.7m, with RM205.8m for JurisTech and RM34.9m for BOL. This would expand CTOS' share base by 6.2%.

Earnings revision. The acquisitions would increase CTOS’ profits from associates, lifting FY22E CNP by 7%. However, the 6.2% earnings dilution from an enlarged share base would weigh in and only enhance FY22E EPS by ~1%.

Positive on acquisitions, reiterate OUTPERFORM with TP of RM2.00. Although the earnings accretion is diluted by the placement, we are positive on the deals, especially on the JurisTech acquisition, as it allows CTOS to provide an end-to-end digital lending service. We maintain our fully-diluted TP of RM2.00 on 55x FY22E PER, as EPS enhancement is insignificant in FY22.

Source: Kenanga Research - 27 Dec 2021