1QFY23 normalised net profit of RM20.8m (+23% YoY) and 0.433 sen dividend were within expectations, with stronger subsequent quarters expected. CTOS has continued to report stronger top line performance driven by rising demand for its increasingly important services which could translate to better economies of scale, and underpin its earnings prospects. Further updates are subject to today’s briefing. Maintain OUTPERFORM with a DCF-driven TP of RM1.80.

1QFY23 broadly met expectations, as normalised net profit of RM20.8m made up 20% of our full-year forecast and 21% of consensus full-year estimate. Earnings contributions are expected to skew in subsequent quarters when more activities from key accounts are expected to pick up. An interim dividend of 0.433 sen was declared (c.60% pay-out) and is deemed to be within our anticipated full-year payment of 2.66 sen (also at c.60% pay-out).

YoY, 1QFY23 revenue surged by 40% thanks to stronger demand in all key services. Segment-wise, key customer accounts demonstrated the highest overall growth (+67%) followed by commercial accounts (+19%) as more digital reports were churned. Operating margins continued to expand (35.8%, +1.1 ppts) as the higher volumes likely generated better economies of scale. Stripping out exceptional items, 1QFY23 normalised net earnings came in at RM20.8m (+23%).

On a quarterly basis, it is noted that the period under review marked the highest ever reported revenue for the group.

Outlook. The group is expected to continue reaping benefits from growing demand for data and analytics which are expedited by the increasing digitalisation of business operations. Its main key accounts sectors include financial institutions, telecommunication service providers and possibly insurers which are increasing digitalisation of their operations at almost all fronts. Meanwhile, the relevance of credit reporting is expected to rise, especially with their clientele doubling efforts to mitigate asset quality risks, and to improve the health of their books. On the flipside, the group aims to increase ARPUs by cross selling as opposed to raising prices which we believe could also help to develop greater customer stickiness.

Forecasts. Post results, we leave our FY23F/FY24F earnings unchanged for now, pending possible material updates from today’s briefing.

Maintain OUTPERFORM and DCF-driven TP of RM1.80. Our DCF is based on an unchanged WACC of 6.2% and TG of 4%. We ascribed a 5% premium to our 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, and (iii) scalable operations for future regional penetration.

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 - 18 Apr 2023