CTOS said that there is no injunction of any sort in the court decision against its credit scoring services (13%-15% of total revenue). It believes that it operates in accordance with the Credit Reporting Agencies Act 2010 (CRAA). That said, we believe the court’s interpretation still posts a challenge to CTOS’s business model until it is overturned by a higher court which could take up to 3-6 months. We maintain our forecasts, TP of RM1.15 and UNDERPERFORM call.

The group hosted a briefing to elaborate on the proceedings and implications from the recent court ruling. Key pointers are as follows:

1. CRAA has provisions for credit scoring. According to the group’s interpretation of CRAA, it had established meaningful grounds for the provision of a credit score in its credit reports. We gathered that the clauses detailed that a credit report “has bearings on a customer’s (i) eligibility to be provided with credit, (ii) history in relation to credit, or (iii) capacity to repay credit” which could be best communicated through a scoring mechanism. Supporting this are periodic audits and engagements by Bank Negara Malaysia and Ministry of Finance without any concerns raised on its credit scoring facility. The group also opined that credit scoring is a well-established norm globally in enabling stronger financial education, and facilitating assessment of credit worthiness.

2. CTOS had dealt with several cases prior. Since its inception in 2014, CTOS had faced 12 similar cases pertaining to defamation or disagreements with the group’s credit reports and won all of them. Hence, the ruling outcome from the latest case was a surprise given that the group believed it had maintained strict protocol with regards to the maintenance of its credit database. There was further apparent evidential support during the plaintiff’s prior failed bid against Webe (f.k.a. Packet One) on a certain amount owing which had caused a blemish to her CTOS scoring.

3. Appeal is only against the defamation suit. The group emphasised that its appeal to the court’s decision is with regards to the concerned defamation claims and is not against the group’s “overstepping of functions”. It is viewed that the proceedings are not an injunction against the group’s credit scoring facility and hence should be allowed to operate as normal. The appeal process is expected to take up 3-6 months.

4. Credit scoring revenue make up 13%-15% of total revenue, albeit predominantly pertains to the group’s lion’s share key account portfolios (i.e. financial institutions) and direct-to-consumer segment. The group views that there are few downside risks to its top line as its products provide high value-add to their credit assessment processes, in addition to the abovementioned stance that no laws have been breached.

Valuations. We maintain our DCF-driven TP of RM1.15 based on our inputs of WACC: 7% and TG: 0%. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. While there could be merit to the group’s legitimacy in offering key credit scoring solutions, we believe the elephant in the room still stands, i.e. the court’s interpretation that posts a challenge to CTOS’s business model.

So far, it does not appear that an injunction of any sort will be sought by any party against its products. Nonetheless, we believe the onus is on CTOS to show that the court decision will have no impact on its day-to-day operations and financial performance. Maintain UNDERPERFORM.

Risks to our call include: (i) a higher court is to overturn the High Court’s interpretation that CTOS’s credit scoring product is beyond the authority granted by CRAA; (ii) better-than-expected demand for credit-related services, (iii) stronger-than-expected associate contributions, and (iv) further value-accretive acquisitions.

Source: Kenanga Research - 13 Mar 2024