• BUY, lower MYR1.89 TP from MYR1.92 (from a new 2.8 ESG score, as we reduced the score for governance), 38% upside, c.2% yield. CTOS Digital plans to acquire 80% of Prime Analytics Indonesia, a fintech credit scoring start-up, for USD457k (c.MYR2.2m) in a related-party transaction (RPT). It is also acquiring 100% of telco credit scoring company FinScore Inc in the Philippines for USD5.87m (c.MYR27.2m). While we have reservations on both acquisitions from earnings and value-accretive perspectives, the MYR29.4m combined deal size is insignificant to CTOS’s total net asset and earnings base.

• We are neutral on the all-cash acquisitions, as the combined deal size of MYR29.4m is insignificant – at 5.5% of CTOS’s total net assets – and would not have a material impact on near-term earnings, as 2022’s combined losses of USD640k (c.MYR3m) were at 2.9% of our FY23F earnings forecasts. Nonetheless, we are sceptical on the acquisitions.

• FinScore Inc is a pioneer alternative credit scoring fintech company with the highest market reach in the Philippines. Powered by various telco data, FinScore has a wide range of credit-related, fraud prevention, and KYC products. While the valuation, at 1.6x price-to-sales and 3.7x P/BV, looks to be value-accretive to CTOS, FinScore remained in a loss-making position of USD637k in 2022 despite being one of the region’s most promising fintech companies since its incorporation in May 2017 – this implies a rather lengthy incubation period in this space. Also, a 100% acquisition may not be helpful in ensuring the continuity of FinScore’s management/key personnel who were instrumental in the start-up and continued growth of the business in a relatively new market for CTOS.

• Prime Analytics was set up in Aug 2022, with zero revenue in FY22. The RPT nature of the transaction is undesirable, although valuation seems fair at 1.03x P/B. We are unsure of how much market presence the company has in Indonesia, and of its monetisation plans, given that it is in the infancy stage. While creating a scoring model from alternative data sources – such as model phone usage and digital footprint from its telco partners – has huge potential in addressing the new economy and the underbanked population, the novelty effect may not last, and the incubation period is long.

• Forecasts and ESG. On a pro-forma basis, the acquisitions could lower our FY23F-24F earnings by <3%, and net gearing may rise to 0.30 from 0.25 currently. We maintain our forecasts, pending further guidance from management, but our TP is lowered as we bake in a 4% ESG discount. While we still like the secular trend of digitalisation for CTOS, in addition to prospects of establishing an alternative data platform to advance financial inclusion in the ASEAN region, the pace and number of acquisitions it has embarked on since its IPO (including RPTs) and the potentially long incubation period may continue to deter investor sentiment.

Source: RHB Securities Research - 28 Aug 2023