We maintain our DCF-derived TP of RM1.80 (WACC: 6.2%, TG: 4.0%) and OUTPERFORM call. CTOS remains confident in achieving its FY23 earnings target despite some setbacks in the recent period. Lumpier prospects in the later half could bolster annual earnings. Meanwhile, the group is reopening considerations for further acquisitions, albeit details and intention may be presently scarce.

CTOS hosted its 1QFY23 results briefing where it shared key factors to meet its FY23 targets, which we find supportive of our present assumptions. Key takeaways are as follows:

i. 2HFY23 bolstered by cumulated new account activations. The group touts a growing awareness for its products on the back of more effective channels and an increase in financial literacy. While values were not attached, the group indicated that customer activation and ARPUs saw improvements of 2% and 7% YoY, respectively, which were mainly led by its digital reports and solutions. We opine the growth in overall transaction could translate into compounded activities which could result in more substantial revenues in the subsequent quarters.

ii. Rooting onto emerging digital players. Further to the above, the group indicated that it has been officially appointed by two out of the five digital bank licensees to roll out e-onboarding solutions. Given that most of these banks are expected to launch in 4QFY23, it will likely fuel group earnings then, with gradual project revenues to be achieved over time.

iii. Seasonal weakness extends to associates. Associate contributions saw a 8% decline YoY but a 74% drop QoQ. This is despite a higher shareholding in RAM during the recent period (57.7% vs 1QFY22 of 11.6%). While the group attributed this to seasonality, we believe uncertain global macros could have distorted client requirements and led to delay in contract deliveries. That said, the group highlights that overall contract books and pipelines by its associates (including JurisTech and BOL) remain secured and should materialise progressively.

iv. Acquisition prospects are reopened for consideration. There is a continual effort by the group to integrate and synergise efficiencies between itself and associate companies. The group believes that if it could achieve fully said efficiencies, it may consider the possibility of further acquisitions to strengthen its portfolio. There is no indication of the timing or what companies are on the table, but we believe they could be entrenched in digital financial services to complete the group’s existing offerings.

Forecasts. Post update, we make no changes to our FY23F/FY24F assumptions as we believe our current assumptions already well reflect immediate-term prospects. For now, the group maintained its FY23 targets of: (i) revenues of RM250m-RM270m; and (ii) normalised net profit target of RM100m-RM105m.

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 - 19 Apr 2023