Despite some margin recovery in 3QFY24, CTOS's 9MFY24 core net profit was below expectations due to moderating growth in digital report volumes with margins slightly diluting. Notwithstanding its inroads into new digital banks and new sign-ups for E-KYC, revenue risk was flagged as financial institutions, including banks' credit review cycles appear to be less frequent, necessitating the group to trim its revenue and profit guidance. This led to us lowering our FY24F/FY25F earnings by 6%/15% and our DCF-driven TP to RM1.70 (from RM2.00). Maintain OUTPERFORM. Dividend payout ratio in 9FYM24 was at 71% (9MFY23: 65%).

Below expectations. CTOS's 9MFY24 core net profit of RM75.3m made up 66% of our full-year forecast and 67% of consensus full-year estimates.

Although the group typically sees a heavier backload in 4Q due to seasonal demand, we call this set of results a miss, as a precaution on its delivery due to continued delays and lower margin mix as seen in recent quarters (which led us to cut FY24 earnings in the near term despite unchanged guidance).

YoY, its 9MFY24 revenue rose by 21% mainly from stronger demand for CTOS' digital reports from its Key Accounts clientele, including higher digital reports in all three digital banks. However, operating margins were squeezed to 29.5% (-5.3ppts) due to less favourable product mix, leading operating profits to only improve by 3%. Further normalising for its deferred tax exemptions in FY23, the group's core net earnings of RM75.3m would be flat YoY.

QOQ, 3QFY24 revenue gained 4% but due to the similar higher concentration in lower margin digital reports, operating margins had come off (-3.9ppts).

Still, net profits grew by 6% thanks to better contributions from associates.

Highlights. No thanks to slower-than-expected sales arising from delays in contracts as well as lower frequencies on recurring credit reviews, CTOS has made its second revision to guidance in FY24, this time by trimming its revenue target to RM315m-RM320m (from RM340m-RM360m). However, it believes that its profit guidance of RM110m-RM115m remains intact from the commencement of previously delayed projects to kick in by 4Q.

That said, arising from a potentially lower revenue base, the group had also cut its FY25 targets on: (i) revenue to RM370m-RM390m (from RM415m- RM435m); (ii) EBITDA to RM155m-RM165m (from RM180m-RM190m); and (iii) net earnings to RM125m-RM130m (from RM150m-RM160m).

Sheltering from further downside, CTOS looks to ramp up on its commercial segment which it believes holds the largest remaining addressable market in Malaysia. Accelerated activations here are tied to growing business activities in overall retail, manufacturing and service industries. Meanwhile, direct-to- consumer was a bright spot with a 13% YoY growth in revenue in 3QFY24.

Forecasts. In spite of the group maintaining its profit guidance, we opted to trim our FY24F earnings by 6% to RM105m in favour of more conservative revenues and margins from its key accounts segment. Our FY25F earnings were also cut by 15% to be in line with the group's more cautious outlook on the same revenue streams.

Maintain OUTPERFORM but with a lower DCF-driven TP of RM1.70 (from RM2.00). Our lower TP was driven by our revised lower revenue and profit trajectories following the abovementioned moderation of earnings, with our DCF inputs kept with 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.

Despite the earnings shortfall, 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 guidance, there could still be room for upside 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.

Revenue Breakdown 3Q 2Q QoQ 3Q YoY 9M 9M YoY FYE Dec (RM m) FY24 FY24 Chg FY23 Chg FY24 FY23 Chg By Service Digital Reports 41.8 38.5 8.7% 28.4 47.4% 117.2 81.6 43.6% Subscription & Monitoring Service 23.3 23.3 0.1% 23.6 -1.3% 70.2 70.1 0.0% Comprehensive Portfolio Review & Analytics 8.3 10.8 -23.7% 7.7 7.5% 25.5 18.5 37.6% Digital Solutions 6.4 4.1 57.3% 6.8 -5.2% 15.2 18.0 -15.6% Total 79.8 76.6 4.1% 66.5 20.1% 228.0 188.3 21.1% By Segment Key Accounts 38.9 39.9 -2.4% 29.7 31.1% 113.8 83.1 37.0% Commercial 34.3 30.5 12.3% 30.9 10.8% 95.2 88.4 7.7% Direct-to-Consumers 6.6 6.2 5.7% 5.8 13.2% 19.0 16.8 12.9%

Source: Kenanga Research - 12 Nov 2024