• Keep BUY, new MYR2.36 TP from MYR2.40, 55% upside with 1% FY22F yield. CTOS Digital’s 1Q21 core PATAMI of MYR13.2m (+60.8%) met expectations, supported by strong growth in the Key Accounts and Direct- to-Consumer segments, lower interest and FX expenses. It declared a first interim dividend of 0.325 sen/share. Our new forecasts reflect the higher share base and debt following the recent acquisitions. We like the unique value proposition of CTOS in the secular digitalisation trend, its exposure to the fintech space, and market-leading position.

• Healthy growth pace. CTOS’ 1Q22 results came in at 16.4% and 16.2% of ours and consensus full-year forecasts. Notably, the core PATAMI would have grown by 67% YoY to MYR16.3m should we reverse the incremental tax expenses, pending the extension of its tax incentive. We deem the results as in line, as 2H is a seasonally stronger period. The growth in revenue was mainly driven by growing demand for CTOS Data Systems Reports, as well as its digital solutions and comprehensive portfolio review and analytics services. Earnings, on the other hand, were boosted by lower interest costs and the absence of FX losses, which more than offset the hike in staff costs and IT support expenses.

• The marginal 3.9% core PATAMI growth QoQ was boosted by stronger revenue (+10%), thanks to the robust demand from the Key Accounts and Direct-to-Consumer customers and lower administrative expenses (-12.9%). This is given the high base effect from professional fees and corporate exercises in 4Q21, which was partially offset by the increase in the effective tax rate to 25% from 14%. Note that its share of associates’ profit grew to MYR2.4m (+48% QoQ, +46% YoY), contributed by newly acquired Juris Technologies (JurisTech) and higher profit from Business Online (BOL).

• Outlook. CTOS’ FY22 growth is on track, as it is leveraging on the continued recovery of the Malaysian economy with new account activations, along with higher adoption and improvement in financial literacy. Stronger numbers can be expected from its associate companies, especially on the recent acquisition of JurisTech, which should accelerate its growth plans into the new verticals and expand its offerings in end-to-end digital solutions.

• Forecasts and ratings. We have imputed the company’s higher share base and debt into our forecasts, while results in FY22-23F core PATAMI dropping by 4% and 2.5% from our previous estimates, following the completion of the 5% new share placement for the JurisTech and BOL acquisitions. Maintain BUY, with a slightly lower DCF-derived TP of MYR2.36 (Figure 2) from MYR2.40. We continue to like CTOS’ overall growth prospects, which tracks the expansion of the digital economy – with higher demand for its various digital solutions and analytical insights.

Source: RHB Research - 25 Apr 2022