We maintain our DCF-derived TP of RM1.80 (WACC: 6.2%, TG: 4.0%) and OUTPERFORM call. CTOS has announced the acquisitions of credit scoring players in Indonesia and Philippines for a combined price tag of RM29.4m. Though these companies are presently loss making, we believe the translated book valuations are fair. It offers CTOS exposure to these emerging markets where it may inject its capabilities and expertise to groom these businesses to be profitable in the long-term.

CTOS announced the proposed acquisition of an 80% and 100% stakes of ALT Decisions PTE LTD (ALT) and Fintech Platform Ventures Pte Ltd (Fintech Ventures), respectively, for a cash consideration of USD475k (or RM2.20m) and USD5.83m (RM27.22m). ALT and Fintech Ventures are fast-growing credit scoring companies in Indonesia and Philippines, respectively. These deals will be funded via borrowings.

Surprising move, but necessary. We were surprised by the combined acquisitions. While the group had recently warmed up to the idea of reopening discussions for further acquisitions, it has been barely a year since its final acquisition of RAM Holdings’ stake in Sep 2023. That said, we had reckoned that the group’s existing Malaysian and Thailand markets could face saturation risks given an already long-established presence there. The acquisitions could enable a more seamless penetration into these new markets. In addition, given the group’s range of capabilities and expertise in the credit scoring industry, the value propositions it could synergise may accelerate ALT and Fintech Ventures’ medium-term growth.

Fundamentally, both ALT and Fintech Ventures are loss making (FY22 at c.RM14k and RM3.0m) and are acquired on FY22 P/NTA of 0.97x and 0.27x, respectively. In comparison, the acquisition value for CTOS’ final 2.1% stake in RAM stands at 1.6x P/NTA (or 20x PER). We opine that the steep discount is warranted given that the newer markets are still emerging in nature. Additionally, both entities are still reporting losses and their absorption may undermine the group’s FY24 profit target of RM125m-RM130m, hence, the need to extract synergistic gains may be more demanding.

Forecasts. Post update, we trim our FY23F/FY24F earnings by 2%/3% as the group will likely incur higher interest cost going forward. Additionally, ALT and Fintech Ventures may inject losses to the group, albeit at a relatively immaterial amount. We have not considered any long-term synergistic gains from these acquisitions for now.

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 - 28 Aug 2023