• Keep BUY, new MYR1.92 TP from MYR2.22, 43% upside with 2% FY22F yield. CTOS Digital’s 9M22 core PATAMI of MYR64.5m (+99.1%) was ahead of expectations, spurred by growth in all business segments, contribution from associates, and lower interest costs. It declared a third interim dividend of 0.6 sen/share. We continue to like the growth potential from its various digital solutions, leading credit reporting, and exposure to the growing fintech space, tracking the expansion of the digital economy.

• Stellar results. 9M22 results were at 83.7% and 81.8% of our and consensus’ full-year forecasts, with the deviation mainly due to stronger- than-expected profits from associates and lower depreciation costs. Note that our core PATAMI is adjusted for incremental tax expenses of MYR10.8m, costs related to acquisitions, and removal of write-back of the prior year’s tax (MYR5.1m). The 28.9% YoY revenue growth was driven by new customer acquisitions, higher demand for CTOS Digital Reports, Digital Solutions, as well as comprehensive portfolio review and analytics services.

• 3Q22 continued its growth momentum in both revenue (+37.2% YoY, 13.6% QoQ) and core profit (+97.5% YoY, 20.7% QoQ) to MYR52.8m and MYR26.4m respectively, driven by growth in all business segments, and an increase in share of associates’ profit to MYR5.9m from MYR2.2m in 3Q21. EBIT margin improved to 42.9% from 32.0% in 3Q21 and 38.2% in 2QFY22, given the better operating leverage.

• New solutions and clientele. CTOS is on track to surpass its FY22 growth target, as business segments and associate companies are on positive trajectory. Management is positive on the sustainability of its performance into 4Q, given the growing need for digital solutions like eKYC, CAD, and IDGuard. This is supported by a strong pipeline, with the launch of end-to- end Digital Money Lending solutions from synergies with Juris Technologies (JurisTech) and onboarding of three digital money lenders. Recent launches of CTOS Car Insurance and the Vehicle Check online platform are solutions in the new verticals to grow its Direct-to-Consumer segment.

• RAM Holdings (RAM) is now a 57.675%-owned associate, and will remain so in line with the commitment to maintain its independence. The total acquisition cost of MYR153.85m implies a valuation of MYR266.75m for the company at 22x FY21 P/E. Moving forward, management indicated that acquisitions will be put on hold for the next 1-2 years, following the recent spree of purchases – Business Online, JurisTech, and RAM.

• Our FY22F/23F earnings are raised by 10.4% and 4.4% as we lower the depreciation expenses and raise contributions from associates. However, our DCF-derived TP is cut to MYR1.92 as we factor in debt funding, WACC assumptions, and valuation of RAM at cost. A 2% ESG discount is baked into the TP, as the ascribed ESG score of 2.90 is below the country median. Downside risks: Changes in the regulatory environment, slower-than- expected topline growth, and data security breaches.

Source: RHB Research - 28 Oct 2022