Investment Highlights

• We maintain BUY on CTOS Digital Holdings (CTOS) with an unchanged SOP-based fair value (FV) of RM1.80/share. We ascribe an unchanged 4-star ESG rating, which adds a 3% premium to our FV.

• Our FY24F-25F earnings are maintained as FY23 core earnings of RM104mil (+23% YoY), after stripping out prior year taxes which had been written back and a one-off acquisition cost of RM14.4mil, came in within expectations, just 1%-2% below our and consensus estimates. We introduce FY26F earnings with a growth of 27% premised on revenue expansion of 16% and 3%-point pretax improvement.

• YoY, FY23 revenue rose by 34% mainly due to robust growth from all business segments. The increase in revenue for key accounts (+51% YoY) and direct-to-consumer (D2C) (+46% YoY) segments were supported by a stronger demand for CTOS data systems reports, digital solutions and comprehensive portfolio review/analytics services. FY23 net profit increased by 22% YoY mainly due to higher revenue from comprehensive portfolio review/analytics services, digital reports and solutions as well as higher share of profit from associates (+12% YoY).

• QoQ, 4QFY23 net profit slid by 3% due to higher operating expenses on staff cost and IT coupled with higher finance cost related to new borrowings for acquisition. Gearing ratio remained healthy at 0.22x while net profit margin remains solid above 35% over the past 4 quarters.

• We continue to hold a positive outlook on the stock, owing to CTOS' multifaceted approach to driving future earnings growth. The company’s associates continued to contribute significantly by increasing new solutions and have acquired 12 clients for its new digital lending platform for moneylenders. Additionally, CTOS is well-positioned to capitalise on emerging trends in digital banking and financial services.

• RAM contributed 23% of FY23 total associate profits. For RAM, we anticipate a 10% revenue growth in FY24F driven by: (i) new contribution on Digital Issuer Platform (a JV between RAM and Bursa Malaysia) which is a debt fundraising platform for PLCs and unlisted entities, (ii) ongoing quarterly publication of RAM-CTOS BCI Index, and (iii) new products solution to corporates and SMEs.

• CTOS continues to focus its growth on key account segments by increasing the adoption of digital solutions (eKYC, CAD and IDGuard), resulting in a total of 142 clients onboarded as at 4QFY23 (from 135 customers in 3QFY23). We understand that CTOS will also cross-sell digital solutions to their existing customers to increase revenue.

• International segment contributed 2% of total FY23 revenue. We believe that its international segment will continue to grow by increasing product penetration in the banking and fintech sectors as well as cross-selling new products to existing and new customers to gain more market share.

• 4th interim dividend of 1.706 sen/share has been declared, bringing FY23 dividends to 3.33 sen/share, translating to a payout of 65%. We revised our FY24F-FY26F DPS to a dividend payout ratio of 65% as the company is likely to continue rewarding shareholders on its resilient earnings.

• The stock is trading at an undemanding FY24F PE of 26x, below its 5-year mean at 34x.

Source: AmInvest Research - 2 Feb 2024