• Keep BUY and MYR1.92 TP, 25% upside with c.2% FY23F yield. CTOS Digital delivered a strong FY22 core PATAMI of MYR85.1m (+85.5%) that met expectations, supported by growth across all business segments and contributions from associates. It declared a fourth interim DPS of 0.36 sen. We remain optimistic on its continuous growth strategy of expanding product solutions, cross-selling and customer acquisitions – all to be achieved on the back of growing adoption of digital solutions.

• Closing off a superb year. FY22 core PATAMI met 100.0% and 101.9% of our and consensus full-year forecasts, after adjustments for incremental tax expenses, costs related to acquisitions, and the removal of write-backs of the prior year’s tax (MYR5.1m). Revenue grew 30.7% YoY and the EBIT margin expanded by 2.8ppts to 34.5%, buoyed by healthy revenue growth in all segments. Strong demand for CTOS’ data systems reports, digital solutions, comprehensive portfolio reviews as well as CTOS Credit Manager fuelled its outstanding profitability, offsetting the higher staff and IT-related costs. Interestingly, the international operations achieved a 95% growth in profit from higher bulk data sales to new customers.

• 4Q22. Revenue and core PATAMI grew 36% YoY and 52.8% YoY to MYR52.7m and MYR20.6m, driven by organic growth on top of the increase in the share of associates’ profit to MYR8.4m, from MYR1.6m in 4Q21. Sequentially, revenue was flattish while core PATAMI contracted by 21.8%, mainly due to a lower contribution from international operations, its GPM being affected by the product mix, and higher operating expenses.

• Still upbeat. Following an acquisition spree over the past two years, CTOS is reaping the fruits of its labour with an increase in share of profits by 419% YoY in 4Q22, and by 212% YoY to MYR22.5m in FY22. On top of the growth trajectory from its business-as-usual operation, management is also upbeat on its international operations leveraging on Business Online, the adoption of the digital lending platform and the cross-selling opportunities with Juris Technologies and product expansions such as the new Digital Issuer Platform with Bursa Malaysia, ESG Ratings and SME Credit Ratings with RAM Holdings. All in, the management remains committed to achieving >20% CAGR growth for FY23 and beyond.

• A sound capital structure. Management is exploring share buyback initiatives to enhance shareholder value, improve ROE and optimise the capital structure, as the company is able to generate healthy FCF of c.MYR100m pa, while the net gearing level remains healthy at 29%.

• No major change to our forecasts except for minor tweaks post model up- keeping exercise. Our DCF-derived TP remains at MYR1.92, with a 2% ESG discount baked in – since CTOS’ 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 - 2 Feb 2023