1HFY22 normalised PATAMI of RM39.5m (+27% YoY) and interim dividend of 0.59 sen declared are within expectations. We keep our OP call but review our terminal growth assumption on slightly less optimistic long-term outlook resulting in a lower DCF-TP of RM1.55 (from RM1.65, WACC: 6.2%, TG: 5%). We applied a 5% premium to our TP based on our 4-star ESG rating on the group for its position as a sustainability enabler as well as commendable board representation. We believe CTOS serves as a solid Shariah-compliant and ESG pick.

1HFY22 within expectations. 1HFY22 normalised PATAMI of RM39.5m made up 50% of both our and consensus expectations. An interim dividend of 0.59 sen (YTD: 0.91 sen) is also deemed to be within our expectation. We anticipate a full-year payment of 1.86 sen (based on a 55% payout ratio).

YoY, 1HFY22 revenue gained 18% to RM89.2m thanks to better contributions from all segments, mainly from Key Accounts (+32%) on higher adoption rates. Better economies of scale was achieved from the greater volume, lifting operating profits (+21%) and margins (36.4%, +1.1ppt). Stripping out exceptional items, including a tax writeback of RM4.2m from recently approved tax incentives, normalised earnings came in at RM39.5m (+27%).

QoQ, 2QFY22 revenue was sequentially stronger (+9%) also due to better all- round performance, possibly driven by a more robust economic environment. Similarly, we saw margin expansion from the larger-scaled operations which translated to a 2QFY22 normalised earnings of RM22.6m (+34%).

Outlook. With its acquisition pipeline looking intact and likely to materialise, CTOS appears to be solidifying its position as the leading credit assessment agency in the market. Its aspired majority stake in RAM Holdings is likely to reach upwards to 70% (from 39.1% after Creador’s disposal) with interested parties possibly taking up CTOS’s RM28.50/share (amounting up to RM88m) cash consideration. Recall that the group intends to fund these transactions with internally generated funds or borrowings. Post acquisition, the group aims to benefit from new propositions in bond ratings and credit scoring products targeted at key SME markets. Until then, the group will continue to seek new opportunities from JurisTech’s scalable end-to-end digital lending solutions and exposure to the Thailand market via BOL.

Post results, we leave our FY22E/FY23E earnings unchanged.

Maintain OUTPERFORM but with a lower DCF-driven TP of RM1.55 (from RM1.65). Though we left our WACC assumptions (6.2%) unchanged, we opted to tone down our terminal growth to 5% (from 6%) as long-term growth projections could be hampered by unstable global macros. That said, we ascribe a 5% premium to our CTOS’s fair value in line with our 4-star ESG rating for the stock. We view CTOS favourably in a sustainability standpoint as it offers ESG analytics and solutions through its stake in RAM Holdings, enabling better education, and encouraging adoption on top of its creditable management diversity as well as exemplary transparency. In addition to being Shariah-compliant, we view CTOS to be a strong ESG-centric pick.

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 - 27 Jul 2022