Kenanga Research facilitated CTOS's maiden non-deal roadshow (NDR) in the USA, taking the CEO and CFO of CTOS to meet with up 10 asset managers, including existing shareholders. We gathered that key interests lie in CTOS's long-term prospects beyond how it navigates around present challenges. Maintain our forecasts, DCF-TP of RM1.70 and OUTPERFORM call.

In Nov 2024, CTOS participated in an NDR across four major cities in the US (New York, Chicago, Salt Lake City, Los Angeles) to meet with a host of asset and portfolio managers who have taken interest in Malaysian equities, specifically CTOS. While a minority have previously invested and have been following developments of CTOS, there was a handful who had initial engagement with the group and has taken a fresh interest, given that CTOS's business model is highly relatable given no shortage of credit reporting services in the US (i.e. Experian).

During the roadshow, we gathered on several common talking points, being: i) CTOS's longer-term earnings potential and margins. As the leading credit reporting agency in Malaysia, there were questions over how CTOS would be able to grow its top line and margins, particularly with regards to its lion's share key accounts business (i.e. financial institutions).

While the group benefits from the developing financial services industry with the introduction of digital banks and growing demand for financial services (lending, insurance), CTOS leverages the cross-selling of products beyond credit scoring (i.e. subscriptions, analytics) in addition to providing digital solutions though the trade-off is a slightly lower gross profit margin in the initial stage before margin normalizes. ii) Doubling down on international presence. CTOS has gradually widened its presence across ASEAN with international revenues making up 13% of the group. This was enabled by its acquisitions of telco scoring companies in Indonesia and the Philippines which is expected to further benefit from the appreciation in alternative data which CTOS is developing for credit assessment purposes (mobile phone usage, payment behaviour, digital footprints). iii) Change in guidances needed clarity. The group had recently trimmed its earnings guidances for FY24 and FY25, due to slower credit cycles for its solutions and to re-base current year expectations. Senior management also spent time explaining investment into strategic sales management, especially in commercial, i.e. an area sandwiched between corporates and SMEs, which are bearing fruit. Its longer-term prospects remain intact through both organic (new solutions) and inorganic plans by harnessing its current platform (including for acquisitions into new markets). These appear to satisfy the US investors' curiosity.

Ready to tussle. With any doubts on regulation and authority behind them, CTOS will be only expected to operate smoothly, albeit with a less aggressive near-term trajectory which may dissuade high-growth investors. On the flipside, we highlight the recent registration of two new credit reporting agencies by MoF, which suggests a growing competitive landscape for CTOS and its dominant market presence of 80%. While the new players will offer their respective differentiating propositions to the market (albeit likely corporate-focused), CTOS's position is expected to remain largely rooted in its stronger brand equity and longer-serving database able to provide valuable references and accuracy regarding consumer credit behaviour and scoring.

Forecast. Maintained.

Maintain OUTPERFORM and DCF-driven TP of RM1.70, with our DCF inputs kept with a WACC of 6% and TG of 3.5%. We ascribe a 5% premium to our fair value in line with our 4-star ESG rating for the stock.

Despite the recent earnings shortfall, we continue to like CTOS as we see merits in its: (i) leading presence in credit reporting, (ii) synergistic gains to progressively materialise, and (iii) scalable operations for future regional penetration. Although the group is typically forthcoming with its earnings guidance, there could still be room for upside surprises should its regional ventures perform better than expected.

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 - 19 Dec 2024