9MFY22 normalised PATAMI of RM64.5m (+38% YoY) and interim dividend of 0.60 sen beat expectations, carried by much stronger top-line growth. We raise our FY22F/FY23F earnings by 8%/2% as we believe the group will enjoy uninterrupted organic growth from economic recoveries and loans demand. Maintain OP with a slightly higher TP of RM1.60 (from RM1.55). We believe CTOS serves as a solid Shariah-compliant and ESG pick.

9MFY22 beat expectations, where normalised PATAMI of RM64.5m made up 82% of both our full-year forecast and consensus full-year estimates. The positive deviation appears to be due to greater-than expected revenue growth, led by higher traffic from the group’s key accounts segment. Meanwhile, a 0.60 sen dividend (YTD: 1.51 sen) is also deemed to have beaten our full-year estimate of 1.86 sen.

YoY, 9MFY22 revenue grew 24% as all segments saw better contributions, led by Key Accounts (+36%) and Commercial (+15%) transactions as more credit reporting activities could be moving in tandem with an uplift in overall economic activity. In addition, greater economies of scale stretched operating margins (38.7%, +4.6ppt) and operating profit by 41%. Stripping out exceptional items, including a tax writeback of RM5.1m, 9MFY22 normalised PATAMI registered at RM64.5m (+38%).

Outlook. Having concluded its recent acquisition goals (namely RAM with an existing stake of 57.7%), the group looks to capitalise on the growing adoption of eKYC practices amongst its key clientele, with newly launched end-to-end digital money lending solutions with efforts from JurisTech to further fuel transactions volume. Broadly, the group opines that the demand for credit reporting products will likely remain healthy as our national economic outlook still appears promising with loans growth remaining highly supportive despite being in an interest rate upcycle. Though there are likely no direct impact from unfavourable ongoing macros (i.e. energy crisis, commodity price swings), the group remains cautious with its projections and sought to keep its earlier earnings target of RM80m.

Forecasts. Although the group maintained its FY22F normalised PATAMI target of RM80m, we reckon it is likely to breach this given its revenue growth trajectory. Hence, we raise our FY22F/FY23F earnings by 8%/2% mainly to account for better topline performance across all business segments.

Maintain OUTPERFORM with a higher DCF-driven TP of RM1.60 (from RM1.55). Our DCF is based on an unchanged WACC of 6.2% and TG of 5%, with the higher TP derived from our earnings estimates increase. We ascribed 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 - 28 Oct 2022