• Reiterate BUY and MYR1.89 TP, 32% upside with c.2% FY24F yield. 9M23 core PATAMI of MYR75.4m (+17.1% YoY) met expectations, supported by strong core operational performances and higher share of profits from associates. CTOS Digital has also secured approval from the Finance Ministry (MoF) on the extension of a second 5-year tax exemption. It is likely to chart a record-breaking year and beyond, with growth from its various digital solutions and analytical insights, as well as potential new verticals, acquisitions, and increasing footprint.

• Living up to expectations again. 9M23 results met our and Street’s estimates at 72.7% and 72% of full-year forecasts. A 32.6% jump in 9M23 revenue to MYR188.3m was on strong growth in all segments – key accounts (+55.5%), commercial (+14.1%), and direct-to-consumer (+50.6%) – buoyed by strong demand for CTOS’ data systems reports, digital solutions, and comprehensive portfolio review and analytics services, and resumption of Central Credit Reference Information System or CCRIS revenue (a cost pass-through) following the expiry of its fee waiver in Dec 2022. Share of profits from associates also charted a commendable +23.7% YoY to MYR17.4m. Similar factors to the above also drove the YoY (+10.8%) and QoQ (+14.7%) growth in 3Q23 core PATAMI to MYR29.1m. A third interim DPS of 0.64 sen (ex-date: 23 Nov) was declared.

• Finally, the tax incentive renewal! On 27 Oct, CTOS finally received approval from MoF on the extension of a second 5-year tax exemption from 9 Nov 2021 to 8 Nov 2026. There will be a reversal of c.MYR27.8m in tax provisions from Nov 2021 to 30 Sep 2023 to be recognised in 4Q23. Note: We have been factoring in this tax incentive into our earnings forecasts and added back the additional tax expenses into our core PATAMI computation.

• Still upbeat on growth. Management is optimistic on CTOS’ growth trajectory, with higher ARPU fuelled by rising adoption of digital solutions and in-depth analytical insights, new customers on-boarding, and financial literacy drives. The recent ASEAN expansion via acquisitions in Indonesia and the Philippines offer long-term growth potential for alternate data creditcentric solutions. New adoption from both financial institutions and insurers of its client on-boarding (eg e-KYC) and loan origination systems are set to propel growth going into FY24. Besides, product expansions – eg the new digital issuer platform with Bursa Malaysia, ESG ratings, and SME credit ratings – are also set to further drive growth at associate company level.

• Reiterate BUY. We maintain our forecasts as results were in line. Our DCFderived TP remains at MYR1.89 with a 4% ESG discount baked in, as CTOS’ 2.8 ESG score is below the country median. We like the firm as a proxy to the secular trend of digitalisation, recession-proof business model, solid earnings delivery, cash flow generation, and strong ROE, which stands out in the sector. Downside risks: Regulatory environment changes, slower-than-expected topline growth, and data security breaches.

Source: RHB Securities Research - 30 Oct 2023