9MFY23 normalised net profit of RM75.5m (+13%) and 0.63 sen dividend were within expectations. 4QCY23 couldsee more activities as opposed to 1HFY23’s softer period, holding group profit guidance firm. This would be supported by its recent regional acquisitions going forward. The group has also obtained the approval for its 5-year extension of tax exemption, which would last until 4QFY26. Maintain OUTPERFORM with a slightly higher DCF-driven TP of RM1.85 (from RM1.80) on revised risk-free rate inputs.

9HFY23 within expectations. CTOS’s 9MFY23 normalised net profit of RM75.5m was in line with our full-year forecast (76%) and consensus full-year estimates (72%), adjusting for incremental taxes paid prior to the award of its pioneer tax status exemption. A third interim dividend of 0.63 sen was declared (c.60% payout) and is deemed to be within our anticipated full-year payment of 2.61 sen (also c.60% payout).

YoY, 9MFY23 revenue rose by 33% as all key services reported stronger contributions. Segment-wise, key customer accounts continued to lead (+56%) on the back of growing demand for digital credit reports. That said, operating margins appeared to dilute to 34.8% (-3.9ppt) as more cross-selling activities could have skewed product mix. Excluding exceptional items, 9MFY23 normalised net profits came in at RM75.5m (+13%).

Outlook. CTOS’s recently completed acquisitions of Finscore, the Philippines and Prime Analytics, Indonesia would open new avenues for the group in enlarging its credit scoring footprint. This would embolden the group’s key efforts to boost alternative data solutions which depend on telco, ecommerce, e-wallet, utility and social media data as credit alternatives. Meanwhile, the group has at last obtained the extension of its tax relief for its pioneer status for the 5-year period up to 8 Nov 2026. Anticipating continued momentum from its existing product portfolios, the group believes it could deliver a normalised profit after tax of RM100m−RM105m for FY23, RM127m−RM135m for FY24 and RM150m−RM160m for FY25.

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

Maintain OUTPERFORM with a slightly higher DCF-driven TP of RM1.85 (from RM1.80). Our revised TP came from adjustments to our risk-free rate to 4.0% (from 4.5%), lowering our WACC to 6.0% (from 6.2%) while leaving our TG of 4% unchanged. 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. Although the group is typically forthcoming with its earnings guidances, there could still be room for surprises should its regional ventures perform better than expected.

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 - 30 Oct 2023