We lower our TP to RM1.65 (from RM2.00) based on more reserved DCF-assumptions (WACC: 6.2%, TG: 6.0%), reflective of the rising risk-free rate as well as the increased volatility in CTOS. Still, we maintain OUTPERFORM on the stock, as the notion for increasing its stake in RAM Holdings (RAM) is overall beneficial and will only improves the group’s long-term propositions.

CTOS hosted a sharing session to brief on its intention to commence a general offer to increase its stake in RAM from 19.2% to 55%-60%. We are positive on the overall development as it is earnings accretive which would open new opportunities for the group in the bond rating space as well as including value-enhancing offerings to clients. Key takeaways are as follows:

- Acquisition cost of RM100m-RM122m. RAM’s current implied blended valuation stands at RM280m-RM300m which translates to c.18x PER (close to the group’s previous acquisitions’ valuation). Depending if the group would ultimately end up with a final stake of 55% or 60%, funds required would amount to between RM100m and RM122m. For now, Creador (via Oscar Matrix) is interested to disposing its entire 19.9% stake in RAM and would agree to transact at a discounted price (up to 10%).

- No capital fund raising on the table. The group expressed to fund the entire exercise via internally generated funds and borrowings. Hence, no share dilution should be expected. Currently, the group is in a net cash position, and a full undertaking via debt will place the group at a net gearing level of 0.3x in FY21.

- Absorption as a subsidiary to uplift earnings. The group projects RAM to be able to at least sustain an earnings performance of RM13m-RM15m. This calls for the group to increase their FY23E earnings guidance to RM95m-RM100m (from RM90m-RM94m) before incorporating any synergies from the acquisition. We reckon that any new offerings would take time to hit the market given the need to integrate and align new propositions as bond ratings and credit scoring products are starkly different. Key targets to the group would still be SMEs.

Post update, we make no changes to our FY22E/FY23E assumptions as the acquisition is still subject to shareholders’ approval.

Maintain OUTPERFORM but with a lower DCF-driven TP of RM1.65 (from RM2.00). Our DCF assumptions comprise WACC of 6.2% with a terminal growth of 6.0%, which we believe is justified given CTOS’ high growth propositions. Our lower DCF-TP is largely due to recalibration of risk-free rate as well as fluctuations in beta, which has been mostly unfavourable for the stock in lieu of the recent sell-down, brought about by recessionary and cyclical concerns. That said, although the stock is not a prominent dividend yielder, we do not discount more vibrant prospects as the group moves away from acquisitions and might seek to reward shareholders.

Risks to our call include: (i) lower-than-expected demand for credit- related services, (ii) incurrence of unexpected costs, and (iii) loss of pioneer status.

Source: Kenanga Research - 22 Jun 2022