• Keep BUY, new MYR1.84 TP from MYR1.77, 27% upside and 2.3% FY24F yield. The Court of Appeal overturned the High Court’s decision on the defamation case ruled in favour of the plaintiff on Mar 24, by stating there was no case of defamation, negligence, or breach of statutory duty against CTOS and that credit reporting agencies (CRA) may formulate and publish credit scores. This new development is a boost to CTOS and the CRA business as a whole, given the legality of formulating and publishing credit scores is no longer in doubt and such a verdict may deter similar claims in the future.

• Decision from the Court of Appeal. The Court of Appeal unanimously ruled that the plaintiff had not made out a case in defamation, negligence, or breach of statutory duties against CTOS Data Systems (CDS), a subsidiary of CTOS Digital; CRA do not owe a duty of care in common law; and CRA may formulate and publish credit scores as part of their business of credit reporting pursuant to the provisions of the Credit Reporting Agencies Act (CRAA) 2010. The court had further dismissed the plaintiff’s cross appeal.

• Background of the case. The plaintiff sued CDS for defamation, alleging having received negative credit rating based on inaccurate information collated by CDS. This resulted in her being considered not creditworthy, leading to personal and business losses and impacting her ability to obtain bank loans. The High Court initially ruled in favour of the plaintiff and awarded general damages of MYR200k and MYR50k in costs. While there was no injunctive order, the High Court judge made an incidental observation that the CRAA did not have any provision empowering CDS to formulate a credit score or to create its own criteria or percentage to formulate the same. This had put the CRA business model in question.

• Forecasts and ratings. We maintain our forecasts but raise our DCF TP to MYR1.84 (from MYR1.77) as we lower the risk premium given the legality of credit scoring in CRA business is now settled and the dismissal of this dangerous precedent stemming from the initial High Court’s ruling may prevent a floodgate of claims against CTOS. Note that our TP includes a 4% ESG discount as its ESG score is below the country median. We continue to favour CTOS Digital as the leading credit reporting agency. It has a recession–proof business model and multiple growth avenues in the digitalisation age, which deliver solid earnings and cash flow generation.

• Downside risks: Regulatory changes, slow topline growth, low adoption of digitalisation, data security breaches, and litigation risk.

Source: RHB Research - 10 Jul 2024