• Reiterate BUY and MYR1.92 TP, 40% upside with c.2% FY23F yield. CTOS Digital’s 1H23 core PATAMI of MYR46.3m continued its growth momentum (+36.1% YoY), buoyed by better performance across all its business segments. It declared a second interim DPS of 0.55 sen (ex-date: 23 Aug). We believe the sustainable growth stemming from CTOS’s various solutions will continue to propel its earnings to another record high which demonstrates its recession-proof business model, especially in the current challenging business environment.

• Meeting expectations. 1H23 results met our and consensus’ expectations at 44.6% and 44.1% of the full-year forecasts, in view of stronger 2H23 numbers on certain seasonality effect. A 43.2% jump in 1H23 revenue to MYR121.8m was driven by the strength in key accounts and direct-to- consumer segments, which grew YoY by 39.5% and 67.7% respectively. This performance was supported by a strong demand for CTOS’ data systems reports, digital solutions, and comprehensive portfolio review and analytics services. The international operations also continued its strong growth trajectory with a 83.5% growth in revenue, thanks to higher bulk data sales. Meanwhile, the GP margin contraction was due to the resumption of its CCRIS revenue (a cost pass-through) following the expiry of its fee waiver in Dec 2022 and its product mix with more digital solutions.

• A better 2Q23. While revenue grew marginally by 4.4% QoQ, core PATAMI grew 22.7% thanks to higher share of associates’ profit at MYR6.8m (+205%) from MYR2.2m in 1Q23. Meanwhile, the YoY core PATAMI growth of 16.7% was spurred by its organic growth in all core solutions, contributed to the 33.8% revenue growth. This more than offset the higher SG&A costs related to more targeted marketing efforts and additional staff-related.

• A better 2H is on sight. Management is optimistic of meeting Streets’ expectation, on the growth trajectory of its business-as-usual operations, new customers on boarding to its digital solutions, successful inroads to digital moneylending space, and a key credit transformation project from the synergistic solutions carved out together with JurisTech. Besides, CTOS is also growing its commercial business by introducing a more user friendly and mobile version of its credit manager. Product expansions such as the new digital issuer platform with Bursa Malaysia, ESG ratings and SME credit ratings are also ongoing at the associate company level.

• Top Pick for the sector. We maintain our forecasts as results were in line. Our DCF-derived TP remains at MYR1.92, with a 2% ESG discount baked in, as CTOS’ 2.90 ESG score is below the country median. As a proxy to the circular trend of digitalisation, its solid earnings delivery, cash flow generation, high margin, and strong ROE stand out in a sector where most semiconductor-related names are in a down-cycle.

• Downside risks: Changes in the regulatory environment, slower-than- expected topline growth, and data security breaches.

Source: RHB Research - 28 Jul 2023