• Keep BUY, with new MYR2.22 TP from MYR2.36, 84% upside and c.2% yield. Management hosted a call to update on the proposed acquisition of RAM Holdings (RAM) following the Securities Commission’s approval to raise its stake. While the acquisition is value accretive given the valuation gap with CTOS Digital, we are neutral on the proposed deal, after considering the weaker outlook of RAM’s core business in today’s operating environment, steep valuation, long gestation period and risk to marketability.

• General offer (GO) to acquire RAM will be announced in the next 1-2 months and will need shareholder approval. Based on preliminary feedback, CTOS is likely to raise its stake to 50-60% from the current 19.225% level. The potential valuation for the GO could range at MYR260m-300m (18-21x FY22F P/E) and will be fully funded by debt financing and internal funds. Note that the 19.9% stake owned by Creador could potentially be sold at a discount to the GO price and will be deemed as a Related Party Transaction upon an independent advisor’s recommendation.

• Leveraging on RAM’s market leadership to build SME ratings solutions to tap into the underserved in the debt capital market at a lower cost and match higher risk- and yield-seeking investors. Besides, the acquisition will allow both companies to leverage on each other’s expertise in credit assessment, data, analytics and digital solutions to further extend their product offering and value propositions to their existing customer bases.

• Growth at a price. The acquisition of RAM is value accretive given the valuation gap to CTOS’s, high cash, and equivalent of 63% of total asset, but the ROE and growth profile are inferior. However, note that the recent two transactions of 9.1% and 2% stakes of RAM transacted in Apr 2022 were at significant higher valuations of 19.7x and 24.6x FY22F P/E vs c.15.6x for the previous transactions done in 2021. This is despite the valuation de- rating for all its listed international peers over the past six months in the current rising interest environment, on top of the illiquidity discount for the non-listed entity. Besides, the long gestation period and risk to marketability for its solution is rather high at the current juncture while CTOS already has a lot to digest following the recent acquisition.

• Remains bullish on CTOS’ prospects. To put into perspective, the size of this potential acquisition is only up to 20% of CTOS’s total assets. On a pro- forma basis, it could potentially contribute an additional 5-7% to FY23F profit, while gearing could rise to 35% from the current 14%. We continue to like CTOS’ leading position and growth prospects, which track the expansion of the digital economy – with higher demand for its various digital solutions, analytical insights, and exposure to fintech. Maintain BUY with a slightly lower MYR2.22 TP on a higher COE and 2% ESG discount as the ascribed ESG score of 2.90 is lower than the country median. Our lower score for governance reflecting potential RPT nature of transactions and recent undisclosed purchase of RAM Holdings’ additional stake are cushioned by the environmental pillar given its nature of business and great initiatives.

Source: RHB Research - 22 Jun 2022