CTOS prospects remain bright despite court ruling

KUALA LUMPUR: CTOS Digital Bhd is optimistic over its day in court, set for July 9, 2024, but analysts are weighing the risks of a potentially unfavourable outcome.

Following a High Court decision in March, the credit reporting agency is scheduled to appeal a ruling that it is not authorised to formulate a credit reporting score under the Credit Reporting Agencies Act 2010 (CRAA).

This came on the back of a lawsuit by a resort owner in Pulau Perhentian, which sued CTOS for an inaccurate credit rating, leading to personal and business losses.

In a company update, Kenanga Research said there does not appear to be any injunction sought by any parties against CTOS’s products.

However, it said the onus remains on CTOS to show that the court decision will have no impact on its day-to-day operations and financial performance.

“While there could be merit to the group’s legitimacy in offering key credit scoring solutions, we believe the elephant in the room still stands, i.e. the court’s interpretation that poses a challenge to CTOS’s business model,” it said.

Hong Leong Investment Bank (HLIB) Research said regardless of the outcome of CTOS’s appeal, it continues to project a premium for the agency given its prospects in an underpenetrated Asean market, with high growth potential.

Employing a free cash flow to the firm (FCFF) valuation, the research firm pegged a target price of RM1.80 for the group in the event of a “winning” litigation scenario, and a lower target price of RM1.20 in the event of a “losing” scenario. In both cases, the implied price-earnings ratios remain above global peers’ average of 25x and their five-year mean of 28x.

Meanwhile, analysts have been updating their spreadsheets following CTOS’s after-hours announcement of its 1Q24 financial result.

The group said net profit rose 26% year-on-year (y-o-y) to RM20.8mil, translating to an earnings per share of 0.9 sen. This was attributable to the lower tax expense following the approval of the tax incentive of its subsidiary, CTOS Data Systems Sdn Bhd. Revenue increased 20% y-o-y to RM71.6mil in the same period.

Kenanga said the group’s results were within expectations as it expects a stronger second half due to seasonal factors, coupled with a better project flow expected during the later part of the year.

It noted also that CTOS emphasised its ability to meet its earnings target of RM125-RM130mil on the back of back-loaded earnings amid several ongoing projects, which could materialise in subsequent periods.

“Under its belt are enhanced e-KYC digital solutions as well as subscription-based features which may also register chunky revenue recognitions while supporting a higher recurring fee business model,” it said.

The research firm maintained its “underperform” recommendation and target price of RM1.15.

HLIB left its forecasts unchanged as the result was in line with its expectations. However it turned less bullish on CTOS given the recent share price recovery, which has balanced the risk-reward profile.

“Downgrade to ‘neutral’ rating but with a higher probability-weighted target price of RM1.50 (from RM1.45), after rolling our valuation year to FY25,” it said.

Meanwhile, RHB Research said it continues to like CTOS as a leading credit reporting agency with a recession-proof business model and multiple growth avenues in the digitalisation age.

“1Q24 revenue and core Patami met our and street’s estimates at 17.2% of full-year forecasts as 1Q is usually seasonally weaker – it made up 18-20% of prior full-year estimates,” it said in a results note.

The research firm maintained “buy” on CTOS with an unchanged target price of RM1.77.