Investment Highlights

• We maintain BUY on CTOS Digital Holdings (CTOS) with a unchanged SOP-based fair value (FV) of RM1.80/share, whic implies FY25F P/E of 33x - 42% discount to its 5-year mean o 56x. We ascribe an unchanged 4-star ESG rating, which add a 3% premium to our FV.

• No changes to our FY24F-FY26F earnings as the group’ 1QFY24 earnings of RM21mil accounted for 17% of our ful year estimate and consensus’. We deem the earnings to b within expectations as 1Q results tend to be seasonall weaker for the commercial segment while revenue recognitio of a few major projects for the key accounts segment has bee deferred from 1QFY24 to 2QFY24.

• We expect better earnings contribution from all busines segments in Malaysia and international operations in th remaining quarters of FY24F. The group onboarded 17 ne clients for the international segment in 1QFY24. The grou declared an interim dividend of 0.64 sen per share (payou 71%) for 1QFY24, higher than 0.433 sen per share (payou 60%) in 1QFY23.

• YoY, 1QFY24 revenue rose by 20%, thanks to bette contribution from both Malaysia and International operations Higher revenue from key accounts (+36% YoY) and direct-to customer (+15% YoY) segments were mainly driven b stronger demand for digital reports and solutions International operations recorded a revenue of RM8.5mil (12% of group) from higher report consumption of existing client in Indonesia and Philippines.

• 1QFY24 net profit seen a muted YoY growth due to lowe margins from unfavourable product mix and internationa segment coupled with a decline in associate contribution from Juristech.

• QoQ, 1QFY24 net profit slid by 27% due to lower share o associate profit (-79% QoQ) and higher depreciation, financ cost of borrowings for acquisitions (+17% QoQ) as well a absence of tax credit of RM27.8mil in 4QFY23. Gearing rati remained healthy at 0.28x.

• We continue to hold a positive outlook on the stock, owing t CTOS’ multi-faceted approach to drive future earnings growth The company’s associates continued to contribut significantly by increasing new solutions and we expec earnings from JurisTech, which declined -43% YoY in 1QFY24 to recover from more robust activities in 2HFY24, supporte by a solid pipeline. We understand that the implementation o software for JurisTech’s customers has a longer lead tim compared to other solutions.

• Meanwhile, international operations will continue to grow from increased product penetration in the banking and fintec sectors as well as cross-selling of new products to existin and new customers to gain more market share in Philippine and Indonesia.

• CTOS mentioned that the hearing for the appeal against the High Court decision against the company is set for 9 July 2024 with a likelihood of a successful outcome. Throughout, CTOS’ operations remained undisturbed and its reputation remained intact. With 5 ongoing litigation cases, external parties advised that CTOS stands a fair chance of successfully defending these cases based on legal precedents.

• The stock is trading at an undemanding 25x FY24F PE, below its 5-year mean of 56x.

Source: AmInvest Research - 8 May 2024