• Stay BUY, new MYR1.58 TP (from MYR1.73), 38% upside, c.3% FY25F yield. 9M24 core PATAMI of MYR74.8m (+6.1% YoY) met expectations. We expect a stronger 4Q24, buoyed by new project recognition and a seasonally strong run rate. The soft YoY growth was due to a lower-margin business, delays in project implementation, and higher SG&A costs. We like CTOS Digital for its long growth runway, with a recession-proof business model against the backdrop of the secular digitalisation trend, as well as the growth in financialand credit-related solutions in ASEAN.

• Within expectations. 9M24 core PATAMI made up 66.9% and 65.4% of our and consensus’ full-year forecasts, as we expect 4Q to make up the shortfall in its full-year performance. Revenue grew 20.1% YoY to MYR228m, driven by growth in key accounts and contributions from new acquisitions (+40.3%), commercial (+6.1%), and direct-to-consumer (DTC)(+12.7%) units.However, lower margins from the international and DTC segments, coupled with higher D&A charges and SG&A expenses, affected EBITDA growth (which was at just 1.2% YoY). The international business acquired in 3Q23 generated revenue of MYR28.7m (+47% YoY) and a profit of MYR2.6m in 9M24.

• 3Q24 results review. Core PATAMI grew 8.5% QoQ to MYR28.2m, supported by healthy revenue growth and associates’ profit. However, it was marginally lower YoY (-3.4%) despite the stronger revenue (+20.1%) and higher contributions from associates, mainly dragged by significantly higher SG&A expenses (+39%) and high finance costs stemming from additional workforce, regional expansions, and marketing expenses.

• Management trimmed its FY25F guidance on earnings to MYR125m-130m from MYR150-160m, mainly on a more cautious growth outlook from the implementation of the sales cycle for its new digital solutions and commercial segment, coupled with additional expenses in relation to a higher headcount and expanding regional marketing efforts. Management remains confident on its growth trajectory, with a huge total addressable market of MYR2.7bn (penetration rate of 10-15%) based on current offerings.

• Management shared details on the robust pipeline across key accounts and the commercial segment, where both activations and consumption are growing robustly amid digitalisation and regulation-driven needs, despite a longer sales cycle and conversions. Associates: JurisTech is expected to continue its momentum with a cumulative pipeline of MYR91m, along with RAM Holdings – given projects delays previously –while Business Online and Experian are expected to remain stable into 4Q24.

• Forecasts. We maintain our FY24F net profit but cut our FY25-26F earnings by 11% and 9% after factoring in slower revenue and higher cost assumptions. As such, our DCF-based TP drops to MYR1.58 with a 4% ESG discount baked in. Downside risks: Regulatory environment changes, slowerthan-expected topline growth, and data security breaches.

Source: RHB Securities Research - 12 Nov 2024