CTOS’s successful appeal on the verdict of its 11 Mar 2024 High Court case has dissipated overhanging business risk to the group. As the group is able to operate accordingly, we revert our call and DCF-valuation back to pre- court case inputs. Upgrade to OUTPERFORM (from UNDERPERFORM) with a TP of RM2.00 (from RM1.15) with unchanged forecasts.

Yesterday, CTOS’s appeal in the Court of Appeal has overturned the 11 Mar 2024 High Court case ruling which previously claimed that the group is not legally empowered to formulate credit scores and was not provisioned in the Credit Reporting Agencies Act 2010 (Act).

Much needed clarity and affirmation. During the appeal, it was also decided that:

i. Credit Reporting Agencies do not owe a duty of care in Common Law; and

ii. Credit Reporting Agencies may formulate and publish credit scores as part of their business of credit reporting pursuant to the provisions of the Act.

We believe that the above could eliminate any existing doubt, and ambiguity that could be posed from interpreting the Act in future cases.

Forecast. Maintained as we had not changed our earnings assumptions attributed to the earlier High Court ruling.

Upgrade to OUTPERFORM (from UNDERPERFORM) and DCF-driven TP of RM2.00 (from RM1.15). Following the abovementioned favourable outcome, we revert back to our DCF inputs of WACC to 6.0% (from 7.0%) and TG to 3.5% (from 0.0%) as the risk premium overhanging to the stock evaporates. In addition, we also reattach our ESG rating of the stock to 4-star (from 3-star) and reinstate its 5% ESG premium.

As its key business and operating risk normalises, we believe investors may return to appreciate its key merits, being a: (i) leading presence in credit reporting (c.80% domestic market share), (ii) synergistic gains to progressively materialise, and (iii) scalable operations for future regional penetration.

Risks to our call include: (i) lower-than-expected demand for credit-related services, (ii) incurrence of unexpected costs, and (iii) loss of pioneer status.

Source: Kenanga Research - 10 Jul 2024