FY22 normalised core net profit of RM89.3m (+50%) and total dividends of 1.87 sen came within our expectations. Secured by resilient demand for its credit solutions, the group is assured of its medium-term trajectory. Higher value transactions could also be churned, compelling us to raise our FY23F earnings by 7%. Maintain OP with a higher DCF driven TP of RM1.80 (from RM1.60) as on stronger medium term inputs. CTOS is one of our 1QCY23 Shariah Top Picks.

FY22 met our expectations, with a normalised net profit of RM89.3m making up 104% of our forecast. However, this beat consensus estimate by 6%, likely due to lower assumptions from associate contributions. A fourth interim dividend of 0.36 sen was declared, amounting to total FY22 payment of 1.87 sen (c.50% payout), nearly spot on to our 1.86 sen expectation.

YoY, FY22 revenue rose 27% driven by greater traction at all fronts. Segment-wise, key accounts customers led with the strongest absolute growth (+40%) alongside commercial accounts (+16%) as demand for digital reports accelerated. Operating margins marginally improved (34.3%, +1.0ppt) on more efficient sales and marketing spending. Stripping out exceptional items, including a tax writeback of RM5.1m, FY22 normalised net earnings came in at RM89.3m (+50%).

Outlook. From current indicators, the group believes the adoption rate of its credit solutions would benefit from the growing demand for data and analytics. In addition to key banking and telecommunications customers, the group looks to add the insurance sector to its portfolio which was of lower participation in the past. The group is disinclined to raise the prices of its services for now and opts to increase ARPU through cross selling but this may lead to some near-term distortion to gross margins (albeit already at a very high base of c.85%). With these expectations in mind, the group opines that it could project earnings up to FY25, with a targeted normalised profit of RM145-RM150m which we gathered translates to 3-year CAGR of c.18% (refer to the overleaf). That said, given the group is primarily involved in credit reporting, we believe it could be hindered by a downturn in overall economic activities, though the group is confident that its profile of recurring transactions could keep earnings sustainable.

Forecasts. Post results, we raise our FY23F earnings by 7% to better match the group’s tone in revenue delivery, namely on its Key Accounts segment. We also introduce our FY24F numbers which translates to a 20% growth in net profit. Our RM122.0m earnings forecast for FY24 is slightly shy of the group’s RM125m-RM130m target as we prefer to be conservative against medium-term uncertainties.

Maintain OUTPERFORM with a higher DCF-drive TP of RM1.80 (from RM1.60). The rise in our TP is mainly due to the incorporation of stronger medium term DCF inputs, reflective of continued strength in FY24-FY25. However, there could be an eventual saturation of the group’s market share until more acquisitions materialise. Hence, we moderate our terminal growth to 4.0% (from 5.0%) while keeping a WACC of 6.2%. We also ascribed a 5% premium to our CTOS’s fair value in line with our 4-star ESG rating for the stock.

We continue to like CTOS as we see merits in its: (i) leading presence in credit reporting (c.77% domestic market share), (ii) synergistic gains to progressively materialise, (iii) scalable operations for future regional penetration. CTOS is one of our 1QCY23 Shariah Top Picks.

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 - 2 Feb 2023