CTOS’s 1HFY24 results were below expectations as its associates were faced with headwinds in project deliveries This led us to cut our FY24F earnings by 11%, falling in line with the group’s revised guidance. That said, this is not likely to undermine CTOS’s longer- term outlook underpinned by continuous growth in customer base and rising demand for credit reports. Maintain OUTPERFORM and TP of RM2.00.

CTOS’s 1HFY24 core net profit of RM47.3m made up 38% each of both our full-year forecast and consensus full-year estimate. Although the group typically experiences a lumpier 2H period due to seasonal factors, we deem current levels to be below expectations due to slower project deliveries from associates which will impact FY24’s overall performance.

YoY, its 1HFY24 revenue rose by 22% on higher contributions from digital reports. However, normalising for its deferred tax exemptions, the group only reported a growth of 2% in core earnings due to a lower product margin mix and higher administrative expenses incurred.

QoQ, its 2QFY24 revenue improved by 7% from better portfolio and analytics demand while its core earnings increased by 27% due to lumpier reporting of associate contributions.

Pinched by delays. While its key credit reporting services are likely to continue enjoying growth from more customer acquisitions and cross selling opportunities, the group hinted that its associates may likely see flattish earnings contributions in FY24. This is mostly stemming from 49%-owned JurisTech (contributed 35% of FY23 associate returns) facing delays on its project deliveries which may hence only be reported in FY25. In addition, the group believes in the need to invest more heavily into brand campaigns and to double down efforts to penetrate into its regional business streams. Given these factors, the group had toned down its FY24F net profit guidance from RM125m- RM130m to RM110m-RM115m.

While the group had abstained from changing its FY25F earnings target of RM150m-RM160m for the time being, we opine that the cumulation of: (i) back-loaded associate returns with (ii) hopefully stronger income streams while (iii) offset by higher operational cost, could still render this range as achievable.

Forecasts. We cut our FY24F earnings by 11% on less optimistic outlook for the group’s associates with FY25F numbers mostly maintained.

Maintain OUTPERFORM and DCF-driven TP of RM2.00. Our TP is on the back of 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 earnings shortfall, we continue to like CTOS as we see merits in its: (i) leading presence in credit reporting (c.80% domestic market share), (ii) synergistic gains to progressively materialise, and (iii) scalable operations for future regional penetration. Although the group is typically forthcoming with its earnings guidances, there could still be room for surprises should its regional ventures perform better than expected.

Source: Kenanga Research - 5 Aug 2024