1HFY23 normalised net profit of RM46.3m (+17%) and 0.55 sen dividend were within expectations. Seasonally, 2HCY periods are expected to be stronger, which we reckon could be due to lumpier demand for annual assessment and reporting purposes. Meanwhile, the group is confident that its growth targets could be met given its growing solutions pipeline and expanding clientele which would fuel demand for existing offerings. Maintain OUTPERFORM with a DCF-driven TP of RM1.80.

1HFY23 broadly met expectations, as normalised net profit of RM46.3m made up 44% of our full-year forecast and 46% of consensus full-year estimate. Earnings contributions are expected to flow in subsequent quarters when more activities from key accounts are expected to pick up. A second interim dividend of 0.55 sen was declared (c.60% payout) and is deemed to be within our anticipated full-year payment of 2.66 sen (also c.60% payout).

YoY, 1HFY23 revenue increased by 37% following greater demand from all key services. Segment-wise, key customer accounts made up the most meaningful growth (+61%) with commercial accounts (+18%) seeing traction both locally and internationally. That said, there was a slight operating margin compression to 34.6% (-1.8ppt) due to poorer product mix seen during the period. Excluding exceptional items, 1HFY23 normalised net earnings registered at RM46.3m (+17%).

Outlook. The group continues to expand its client portfolios across the board with new platforms expected to gain traction and may possibly lift ARPUs. Various tie-ins could further accelerate growth prospects, such as its ongoing joint venture with Bursa Malaysia to provide more ESG solutions and broaden credit rating propositions for SMEs. CTOS also looks to be an active participant in the upcoming digital banking space as it claims to have secured its third digital bank licensee in their development stage. Meanwhile, the group’s tax benefit claims remain under review with hopes to nearing a conclusion. With all these, its FY23 earnings guidance remains unchanged.

Forecasts. Post-results, we maintain our FY23F/FY24F earnings.

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 ascribe 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.80% 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 - 28 Jul 2023