CTOS’s FY23 normalised net profit of RM104.0m met expectations but surprised with a 70% dividend payout. We raise our FY24F earnings by 6% as we become more convinced of the group’s trajectory following its strong foothold in domestic and foreign credit assessment products. Maintain OUTPERFORM with a higher DCF-driven TP of RM2.00 (from RM1.85).

FY23 within expectations. CTOS’s FY23 normalised profit of RM104.0m accounted for 104% of our full-year forecast and 99% of consensus full-year estimate, adjusting for tax provision writebacks. A final dividend of 1.7 sen was declared, amounting to a full-year payment of 3.32 sen. This was above our 2.61 sen expectation as the group sought to raise total payouts to 70%, above its minimum 60% policy.

YoY, FY23 revenue rose by 34% as all key services reported stronger contributions. Segment-wise, key customer accounts continued to lead (+59%) on the back of growing demand for digital credit reports. Operating margins fell slightly to 33.9% (-0.4ppt) possibly owing to poorer margin mix attributed to product cross selling. Excluding exceptional items, FY23 normalised net profits came in at RM104.0m (+17%).

QoQ, 4QFY23 saw a pick-up in overall revenue (+10%) due to larger volume of credit assessments conducted typically during the year-end. With its previous pioneer tax status appeal materialising, the group’s tax credits for the period led to 4QFY23 net profit of RM54.9m (+178%).

Outlook. Meeting its FY23 normalised earnings target of RM100m-RM105m, CTOS stayed emboldened with its FY24 and FY25 guidance of RM125mRM130m and RM150m-RM160m, respectively. The group will continue to reap its strong position in the credit scoring space with demand likely to accelerate with the adoption of more digital centric financial products being introduced to the market. Its regional associate footprint also appears to be gaining prominence, making good on past growth aspirations. With regards to dividends, the group surprised with a better payout of 70% as opposed to its 60% policy rate. We opine that this could translate to even better payout in the coming periods as the group may likely be willing to slow down on further expansion in favour of rewarding shareholders.

Forecasts. Post results, we raise our FY24F earnings by 6% to be more attuned to group’s guidance, particularly backed by the higher volumes expected from its digital reports. Meanwhile, we introduce our FY25F numbers.

Maintain OUTPERFORM with a higher DCF-driven TP of RM2.00 (from RM1.85). Our revised TP came from us incorporating a higher earnings base in FY25F into our DCF on the back of a WACC of 6% and TG of 3.5%. 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 - 2 Feb 2024