• Stay BUY, new MYR1.73 TP from MYR1.84, 22% upside, 2.1% FY24F yield. 1H24 core PATAMI of MYR47.3m (+2.6% YoY) missed expectations due to delays in project implementation and higher SG&A costs despite anticipating a better 2H24. We cut our earnings forecasts to reflect management’s latest guidance. Despite the unorthodox earnings miss, we believe CTOS Digital is set to continue benefiting from the secular digitalisation trend and growth in financial literacy with a recession-proof business model.

• Below expectations. 1H24 core PATAMI missed expectations, at only 21% of our and consensus’ full-year forecasts. This was mainly due to lower-than- expected contributions from associates, and higher-than-expected hiring and marketing costs. Revenue grew 21.7% YoY to MYR148.2m, driven by growth in key accounts and contributions from new acquisitions (+40.3%), commercial (+6.1%), and direct-to-consumer (+12.7%). The growth was boosted by higher sales of data systems reports, portfolio reviews, and various digital solutions. Lower margins from international segments, coupled with higher D&A charges and SG&A expenses, slowed profit growth.

• Review on 2Q24 results. CTOS posted sequentially higher core PATAMI of MYR26.1m (+22.6%), attributed to stronger revenue (+7.1%) and higher contributions from associates. YoY comparisons showed a stronger revenue growth of 23.1% to MYR76.6m, thanks to growth across all business segments. However, core PATAMI was relatively flattish (+2.6%) due to higher D&A charges (+36%) and administrative expenses (+34%), compounded by higher finance costs (+67%) to finance acquisitions.

• Management guidance. Management has lowered FY24 internal profit targets to the MYR110-115m range from the previous MYR125-130m, mainly on slower-than-planned implementation of digital solutions and additional sales team hires, regional expansions, and increased marketing expenses to capture more market share and fuel future growth. FY25 targets are maintained at the MYR150-160m range.

• Stronger 2H24 expectations are supported by robust pipeline and customer conversions, and seasonally stronger demand for reports, and portfolio analytical and digital solutions domestically and internationally. Commercial segments will also accelerate with broader sales funnels and a surge in cross- selling opportunities. Associates: i) JurisTech is expected to trend lower along with RAM Holdings due to the delay in projects implementation while ii) Business Online or BOL and Experian are expected to remain stable.

• Forecasts. We cut our FY24F-26F earnings by 9.8%, 3.4%, and 1.8% after factoring in higher cost assumptions and slower contributions from associates. Consequently, our DCF-derived TP is now lowered to of MY1.73 with a 4% ESG discount baked in. Downside risks: Regulatory environment changes, slower-than-expected topline growth, and data security breaches.

Source: RHB Research - 2 Aug 2024